As they say, death and taxes are inevitable. You do have to face death and there is no way to run away from it. Also, taxes are really necessary for the government. But what if you find a way to cut them down or entirely transmit them? Now this may sound interesting to you. Isn’t it? In the United States, foreign sellers get a reduction in the gain on sale of a United States real estate property. This is the FIRPTA law. According to this law, all buyers who are dealing with foreign sellers would have to pay the taxes from the amount of gain of sale.

If you need help with your FIRPTA Withholding Certificate you can call us at 407-502-2400, or email us at [email protected].

The Internal Revenue Service (IRS) is responsible to hold the taxes. Before 1980, there was no such law like this. This is why the IRS was unable to benefit from foreign sellers disposing off their property. Locals and foreign sellers for real estate property were treated equally back then. Since foreign sellers do not hold a legal identity or green card, they have to pay off taxes for selling real estate property in the United States. Additionally, foreign sellers are considered as non-residents of the United States. Hence, anyone dealing with real estate property and is a non-resident has to pay off taxes for that.

This makes the transaction really costly for buyers as well as for sellers. Therefore, people often look for ways to cut the taxes down or transmit them. One of the great and legal ways to do so is to use a FIRPTA form. You can avoid FIRPTA withholding by filing withholding certificates. There is an entire detailed process to do so. Also, you can omit them if you fall under the FIRPTA exemptions at the first place. If not, then try out the FIRPTA form.

If you want to explore information about FIRPTA law, form and exemptions, read this blog carefully.

FIRPTA Overview

Basically, FIRPTA stands for Foreign Investment in Real Property Tax Act. According to the United States law, everyone is supposed to pay tax on disposition of real interests in United States. Be it a foreigner or a local, everyone has to do that. The only difference is that the locals or residents of the United States are subject to taxes from their regular income according to Internal Revenue Code Section 897, while foreigners are required to pay off taxes from the gain on sale of real estate property being sold. There were some other changes also being made to this section.

Furthermore, non-resident aliens, i.e. foreign persons are taxed on only certain items that are linked with their income. Additionally, according to the Internal Revenue Code Section 897, foreign sellers are not taxed on most capital gains. This is why FIRPTA requires buyers of United States real estate properties to withhold 15% if the sale price on the gain on disposition of an interest in the United States. This is why many sellers wish to apply for the FIRPTA form to the IRS to either transmit or reduce 15% of the amount of tax that they have to provide on selling the United States real estate property. Also, when the sellers apply for the FIRPTA form, the IRS ensures to quickly and routinely approve the application of the seller.

FIRPTA is applied on all foreign owners selling a United States real property. Unless the seller receives a qualifying non-recognition exchange from the IRS, fall under some exemptions, or fill a FIRPTA form, only then they will be able to transmit the amount of taxes.

As mentioned above, there was no FIRPTA law before 1980. This was an advantage for the non-United States corporations, non-citizen or non-resident individuals. These people and entities were exempted from the United States tax on sale of real estate property in the United States. But after some time, in 1980, the Congress passed a PATH Act in which the foreign sellers had to pay taxes on disposition of any United States real estate property. This law was highly prioritized and its provisions were given a lot of priority over other tax treaties and rules.

Definitions Necessary to Understand

As mentioned above, FIRPTA law requires every foreign seller to pay off taxes on disposition of real estate property (USRPIs). Here are some important terms under FIRPTA law that are different than they are used in general. Here are 3 important definitions you need to know in order to understand FIRPTA law properly.

  • Real Property: Under FIRPTA law, real property can be buildings, lands and any land improvements. Normally, real estate properties are treated as US tax law concepts and not state laws. For example, awnings and gas pumps are not considered as real properties in the United States Federal tax laws. Additionally, if we specifically talk about the land as a real property. It is necessary for the real estate property to include natural products such as uncut timber, unharvested crops, gas or oil in the ground.
  • Interest: Interest in the real estate property is any direct equity interest. Also, it may not include sole interests of creditors.
  • United States Real Property Interest (USRPI): Basically, this comes under USRPHC. It is considered the share of United States real estate property holding corporation. When the USRPHC finds that any United States corporation has more than 50% of assets at a testing date, they hold it. Any real estate property held by the USPHRC is considered as FIRPTA withholding and taxable, but it will not be subjected to state income tax.

If you need help with your FIRPTA Withholding Certificate you can call us at 407-502-2400, or email us at [email protected].

FIRPTA Withholding Amount

There were some changes made in FIRPTA law on February 17, 2016. Now, buyers are required to withhold 15% of the taxes. Before this, they were only required to withhold 10% taxes on the purchase of any US real property. This 5% increase has made several foreign sellers upset. But there are different rates for real estate properties to be withheld in every state. So, you need to consult your lawyer first in this regard. This FIRPTA withholding amount can be reduced or transmitted using the FIRPTA withholding certificate, or Form 8288. Filing the form timely by the IRS is essential because penalties apply to the foreign seller if they fail to withhold the amount.

How to Avoid FIRPTA? – The Procedure

When buyers opt for purchasing the real estate property from the foreign seller, it becomes costly for both of them. Foreign sellers either have to pay the taxes or the amount is withheld by the buyers as a tax payment made to the IRS. Paying 15% to the IRS is a hefty amount. This is why many foreign sellers look for ways to file a FIRPTA form. Foreign sellers who wish to file the FIRPTA form, they need to know that first they have to get approval from IRS. The entire procedure is based on a few steps. FIRPTA form can save you from paying a handsome amount and benefit you. Here are some common ways to either transmit or cut down the taxes.

  • You can file 1031 Exchange agreement which is a tax free sale.
  • You can either also transmit the amount of taxes by filling Form 8288 or by applying for the withholding certificate.
  • When you have sale at a small loss or profit, you can transmit or alleviate the amount of taxes.
  • You can also omit taxes when you have sale on inherited property that you own currently.

Applying for Form 8288 – Detailed Procedure

Before we go into the details of how you can file Form 8288, you need to keep in mind that you need to ensure that the form must be signed, stamped and sealed by the responsible IRS officer. Additionally, the procedure may require help from the professional local attorney. The foreign sellers who are filling the form for the first time may find difficulty in understanding the complex and complicated terms written on the form.

Therefore, it is necessary for you to hire a local lawyer so that there are no chances of mistakes and errors. Mistakes would also increase the likelihood of rejection of the application. Consequently, ensure to fill the form correctly so that you can transmit the amount in the first place.

·       Step # 1: FIRPTA Eligibility

When it comes to avoiding FIRPTA, the first thing you need to see is your eligibility. You need to see whether or not it applies on your transaction or not. You have certain parameters to see that. Here are two FIRPTA withholding aspects that can help you determine whether you qualify for FIRPTA withholding or not. Lying under any one condition would make you eligible to for FIRPTA withholding.

  • You are eligible to FIRPTA withholding if you are a non-resident alien selling a USPHRC real estate property.
  • You will be eligible for FIRPTA withholding if you do not lie under the exceptions of FIRPTA

·       Step # 2: Getting a Tax ID Number

Now that you have understood how to determine whether or not you are eligible for FIRPTA form, you need to understand the next step. When you determine that you are eligible for the FIRPTA form, you have to obtain a tax ID number from the IRS. Basically, there 5 five types of tax ID numbers, but now only 3 active types are left. The Individual Taxpayer Identification Number (ITIN), Social Security Number (SSN), and the Employer Identification Number (EIN) are the 3 active types of tax ID numbers. Based on your identity and status, you will be provided the tax ID number. You can obtain any of these numbers in months by filling form W-7, SS-4 and SS-5, respectively. Obtaining any of these numbers is essential because it is required for Form 8288.

·       Step # 3: Applying for Withholding Certificate

In order to obtain and transmit FIRPTA withholding, you need to get through this step properly. You can apply for the withholding certificate by applying for Form 8288. Also, this application must be signed duly by the IRS. It should include the following heads;

  • You have to write your legal name
  • You have to mention complete address
  • You have to write down your Taxpayer Identification Number
  • You also need to mention whether you are a transferor or transferee
  • You also need to provide full legal name and addresses of other members involved along with the TIN numbers
  • You need to mention location and general description about the real estate property
  • You need to write down your type of interest
  • You also need to mention your contract price

Once you are done and have checked all the information you have mentioned in the form, it is time to send the Form to the IRS’s office. Here is the address of the office.

Internal Revenue Service Center

P.O. Box 409101

Ogden, UT 84409

·       Step # 4: Notify the Transferee

Now that you have sent the application form, it is time to inform the transferee of the real estate property. You should notify the transferee that you have sent the application Form 8288 to reduce or transmit the amount to the IRS. Since they are the one liable for the taxes, they will grant you compensation.

·       Step # 5: 1031 Exchange Agreement

The next step is to enter into a tax-free agreement, i.e. sign the 1031 exchange agreement. This agreement will explain that no loss or gain would be taken the government (IRS) in exchange of the real estate property, business or trade. In addition to this, you need to make sure that you are forming the agreement with a Qualified Intermediary. They are professional parties responsible to help you file the agreement seamlessly. No matter how much complicated or complex the issue is, they can help you get through every difficult matter regarding the exchange and transaction.

·       Step # 6: Reporting Sale

Now that you done applying for the withholding certificate and filing the no tax-sale agreement, the last step is to report your sale. In this step, you have to file tax returns for the United States for every year-end sale.

If you need help with your FIRPTA Withholding Certificate you can call us at 407-502-2400, or email us at [email protected].

Exemptions From FIRPTA Withholding

Now that you know how to avoid FIRPTA withholding, you also need to know that you can avoid FIRPTA withholding or filling the FIRPTA form if you are exempt from the following situations. If you fall under the following limitations or exemptions, you will not have to fill FIRPTA form 8288. Check out the exceptions for FIRPTA form below.

·       If the Real Property is a Domestic Corporation

The real estate property that is a domestic corporation and can be used for trade and business purposes will not be considered as a taxable property. It will not be a real estate property for taxes. But this exemption is limited to some states only; consequently, if you are doubtful about the domestic corporation, you need to consult your local lawyer.

·       If the Real Property is Not More Than $300,000

If you to go purchase the real estate property that costs less than $300,000 and is sold by a foreign seller, it will not be taxable. It will be considered as a primary residential property. These kinds of real estate properties will not require you to pay off taxes on the sale price. Additionally, you also need to keep in mind that this exemption can only be enjoyed by the individual transferee.

·       Qualified Statement

When you go to buy the real estate property, the transferor holds the qualified statement by the IRS determining that their real estate property is exempted and does not withhold taxes. In such a case, you need to be very careful as several foreign owners also show a fake document and statement. You can also show that statement to your local lawyer for cross-checking if the statement is genuine or not.

·       USPHC

USPHC stands for United States Properly Holding Corporation. If the real estate property does not fall under the USPHC since the past 5 years or for lesser time period, they are exempted from FIRPTA withholding.

·       Zero Amount

When the United States real estate property interest is zero, there will no taxes due on the real estate property which the buyer wants to purchase.

·       IRS Excuse

When there is a direct notice from the IRS declaring that the real estate property need not withholding the amount of taxes.

Final Thoughts

As a buyer, it is your duty to see the status of the real estate property seller. If you are dealing with a foreign seller for your real estate property, ensure that they pay the taxes as they are legally liable under FIRPTA withholding. Not paying the taxes can charge penalties on both, the buyer as well as the seller.

If you need help with your FIRPTA Withholding Certificate you can call us at 407-502-2400, or email us at [email protected].


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