When a buyer thinks about purchasing a real estate property, they think about it twice because of the FIRPTA withholding policy. If the seller of the real estate property is a foreign person, the buyer may get confused about purchasing the property. This is because they would be liable to pay the taxes as per the FIRPTA law. However, some buyers do not miss the chance and purchase the real estate property anyway (especially if it is too good to overlook).
If you need help with a FIRPTA Tax Withholding Certificate, please call us at 407-502-2400, or email us at [email protected].
Such buyers do not worry about the FIRPTA withholding because they know that they can file a FIRPTA form. This form permits them to completely eliminate or reduce the FIRPTA withholding. But some buyers try to look for sellers who are not foreigners or non-residents of the United States. Now that the FIRPTA withholding law has been revised, 15% of the sales price would be held as taxes for the real estate property. To know more about FIRPTA withholding, keep reading this blog.
To understand FIRPTA withholding, we should first understand FIRPTA in general. Just like there are several laws for taxes, one of the main laws for purchasing real estate properties is FIRPTA – Foreign Investment in Real Property Tax Act. Serving the local tax issues, it claims deductions from the real estate trade. Basically, it is the tax law that withholds the taxes of foreign people who are selling their real estate properties in the United States.
FIRPTA was established in the 1980. According to the FIRPTA withholding law, the Internal Revenue Service (IRS) has all the right to withhold a certain amount for taxes with regards to a real estate property. There was no such law for FIRPTA withholding before and the US government did not gain any income in the form of taxes from the real estate properties of the foreign sellers.
Previously, the FIRPTA withholding law was to withhold only 10% of the total amount but after February 15, 2016, the revised law increased the tax percentage by 5%, making it 15%. Buyers should keep in mind that they would be the transferee and would be liable to pay 15% taxes on the sale price of the real estate property.
If you do not want to pay the taxes or want to avoid FIRPTA withholding, you should either seek a resident real estate property seller or fill a FIRPTA form or withholding certificate to avoid or reduce FIRPTA withholding. There are certain exceptions which would not make the IRS charge you under FIRPTA which we will be discussing in our further sections.
The 15% of the amount that is withheld is then forwarded to the IRS by the closing agent in under 20 days. The IRS holds these funds until they are satisfied and ensure whether or not the taxes are paid by the non-resident alien or not. Furthermore, there is no doubt that FIRPTA can turn out to be really very costly for buyers. Firstly, as they are buying the real estate property and secondly, because they would have to pay off the taxes to the IRS. This is the main reason why so many people are concerned about the process behind avoiding FIRPTA withholding.
Besides, to avoid FIRPTA withholding, you should first know who is considered a foreign person under FIRPTA law. Foreign people under FIRPTA law include those who are partners, a trust, a foreign estate, a foreign corporation, and a non-resident alien individual.
The Rules for FIRPTA Withholding
Now that you know what FIRPTA really is, it is time to properly understand the rules and regulations. Here are the rules for the FIRPTA withholding.
- As a foreign person, you will have to insure 15% of the gross sales price. This amount will be withheld by the Internal Revenue Service (IRS) and will be called as the seller’s tax obligations. As some states of the United States have some other additional requirements, you should consult your lawyer in this regard.
- Those who are citizens holding US citizenship and green cards would not be considered as foreign people; hence, they will not be liable for the FIRPTA withholding.
- If a house is purchased by a buyer for less than $300,000, FIRPTA withholding will not apply on them because property purchases under this amount are considered as the primary residence.
- If a buyer wants to reduce or completely avoid FIRPTA withholding, they should get approval from the IRS first. The procedure may take some time but would definitely be effective. You can avoid FIRPTA withholding by doing the following.
- Filing a tax free sale i.e. Section 1031 Exchange
- Filling a withholding certificate or Form 8288
- Sale of a currently inherited property
- Sale at a small profit or loss
How to Ensure to Avoid FIRPTA Withholding?
There are a number of disadvantages for those buyers who are dealing with foreign sellers of a real estate property. Now that you have got to know that how costly and detrimental it can be for you if your amount is withheld by the Internal Revenue Service (IRS), you may be seeking ways to avoid it, isn’t it? Therefore, here are some ways in which you can avoid FIRPTA withholding.
· Check the Status of the Seller
The first and most important red flag to watch out for is the status of the seller. If the seller is not a United States citizen, you should not make a deal with them in the first place. You can determine the status of the seller by asking for their green card or proof of US citizenship and identity. If they are able to prove their legal identity or US residency, consider them as you go-to option.
· Look for the TIN Number
The tax ID number is of 3 types; an Individual Tax Identification Number (ITIN), a Social Security Number (SSN) and an Employer Identification Number (EIN). The real estate seller should have any one of these. When you consider a seller for a transaction, you should ask for their TIN number as well. If they do not have it, you should reconsider the deal.
The TIN number is required for the closing or for the withholding certificate. It is necessary for them to have it because it is required for the transaction. The process for applying for a TIN number (ITIN, SSN, or EIN) is very easy and it will only take a few weeks. So, if you are really interested in the seller’s real estate property and if they do not have a TIN number, you should ask them to apply for a TIN number for a smooth process.
· Watch Out for a False Non Foreign Certificate
This is again one of the main elements in checking the credibility of the seller and avoiding the hazards associated with FIRPTA withholding. The buyer, or their agents, should have a sound knowledge about the seller. Often, some foreign sellers hold a false non foreign certificate to fool buyers. Buyers do not like purchasing properties from foreign sellers because of FIRPTA withholding. Therefore, some foreign sellers hold false non foreign certificate so that buyers buy their real estate properties.
This is not right and being a buyer, you must get their certificates checked from a professional lawyer. Also, if you find such sellers, there are chances that they may be selling illegal properties as well. They are liable to pay taxes and should be subject to strict and cruel criminal penalties by the United States government.
· Clarify the Exemption from FIRPTA
Often, there are sellers who believe that real estate property is an exemption to FIRPTA withholding. There are certain exemptions for FIRPTA, including the fact that a property is sold for less than $300,000, only if the buyer intends to use the property as their own or personal.
If the seller has such kinds of misconceptions and misunderstanding, they should be clarified by the buyer at the earliest to avoid any future issues. This misunderstanding can lead to very costly consequences, making them liable to pay 15% of the taxes to the IRS. To avoid this hazard, as a buyer, you should better clarify things from the beginning.
How to Avoid or Reduce the FIRPTA Withholding? | Withholding Certificates and Form 8288
If a buyer wants to completely avoid or reduce the amount of FIRPITA withholding, they can obtain withholding certificates and Form 8288. For a smooth process, either the buyer or seller can apply for the withholding certificate or Form 8288. But before we go into the details of avoiding FIRPTA withholding, you should first understand that Form 8288 has been revised by the IRS and you need to file the revised form, and not the older one, to reduce the amount of taxes.
Revised Form 8288
Since the law has been revised and now the buyers have to pay 15% of the tax amount instead of 10% of the taxes, therefore, to reflect this change of 15%, the IRS had to revise the Form 8288. According to the code section 1445 (a), the newer version of the Form 8288 has some new instructions and details in it.
The new details and revisions focus on the increase of the code section 1445 (a). Also, the form discusses some more amendments by the PATH Act. Also, it elaborates about the exemptions from the FIRPTA withholding. If you want to know about the new and revised Form 8288 in detail, you can read the instructions by the IRS here.
Issuance of Withholding Certificate
Coming back to how you can avoid FIRPTA withholding, here is the process to get the withholding certificate. This is the certificate to minimize the rate so that the IRS charges low, or completely eliminates the taxes on the real estate property. To obtain the withholding certificate, you first need to get Form 8288. These forms have to be sealed and stamped by the IRS. These forms have certain elements involved in them which you also need to understand. We have explained them in our further section, so read it carefully to fill the FIRPTA withholding form properly.
Process to Fill Form 8288
The application of the FIRPTA withholding seems complex but if you hire a credible lawyer, they can help you get through the process seamlessly. Also, it is necessary to be duly signed by the responsible officer of the IRS. Here are the steps that you need to follow for FIRPTA withholding.
- The first step to avoid FIRPTA withholding is to see whether it applies on your real estate transaction or not. If you fall under any of the exceptions of FIRPTA withholding, or are a foreign person selling in the United States property interest, then you will be liable for FIRPTA withholding.
- Next, you need to obtain a tax ID number from the IRS. The seller needs to have an ITIN, SSN or EIN number for this process.
- After your seller has the Tax ID number, it is time to apply for the withholding certificate. You can apply for the withholding certificate by filing the Form 8288 – B. It should contain the name, address, contract, price, type of interest, and location along with the general description of the property. After ensuring that everything is written properly and correct, you should send the application to Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.
- Now that you have sent the application, it is time to notify the transferee that you have applied for the withholding certificate. This notification will alert them and on approval, they will be able to grant you compensation.
- Afterwards, you will also have to fill a 1031 exchange agreement. It is important to form this agreement by hiring a credible attorney having a certification so that they can guide you about the withholding agreement accordingly.
- To properly complete your qualified intermediary agreement, you should ensure about certain elements, such as the net proceeds of your sale and whether or not your replacement property is either greater or equal in amount to the new property.
- Lastly, you are required to report your exchange to the IRS so that they consider your tax reduction.
Parties Involved in the FIRPTA Withholding Process
There are certain elements and parties involved in the withholding process which have different meanings with respect to a US real estate property interest.
Dispositions are a real estate property interest for the seller and required for the tax withholding. In this case, the buyer is the withholding agent. As a buyer, you need to ensure that the seller is not a foreigner or else, you will be liable to pay off taxes, i.e. dispositions.
· United States Real Property Interest
This term means that any property, land, farm, corporation or any building located in the United States or the United States Virgin Islands is considered a United States property interest.
· Foreign Person
In this case, the foreign person is the non-resident individual who sells the United States property. They cannot be resident aliens.
This is the individual, domestic or foreign person, who owns the real property interest by exchange, purchase, gift or any other transaction. To be precise, this individual is the buyer.
This is the individual who is willing to sell the United States real estate property by exchanging, gifting, or any other transaction. To be precise, this individual is the seller.
· Amount Realized
This is the amount that is finalized between the transferor and transferee. It can be equal to the fair market value, or even more or less than that.
Exemptions of FIRPTA Withholding
There are a set of requirements for FIRPTA withholding for every real estate transaction. If you meet any of the following exemptions, you are not liable for FIRPTA withholding.
- If you own a real estate property for your personal use and the sale price does not exceed $300,000.
- If you present the FIRPTA withholding certificate from the IRS or the FIRPTA form 8288, then you will not be liable to pay the taxes.
- If the transaction is not of a non-public domestic corporation where the company determines that it is not the United States real estate property.
- If the Secretary of the Treasury declares that the foreign seller is exempted from the taxes imposed on them.
So, all those who are worried about FIRPTA withholding should first see the exemptions. Also, you must make smart decisions as a buyer and look for a seller belonging to the United States to avoid the FIRPTA withholding. Now that you know all about FIRPTA, we hope you find this blog helpful and make a wise decision.
If you need help with a FIRPTA Tax Withholding Certificate, please call us at 407-502-2400, or email us at [email protected].