FIRPTA stands for The Foreign Investment in Real Property Tax Act. The Act states that the buyer of an interest in U.S. real estate property must withhold a certain percentage of the purchase price if the seller of the U.S. based property is a foreign national. If the buyer of the property does not withhold the required amount, he/she will be liable to pay the tax.
If you need help with your FIRPTA tax withholding certificate, please call us at 407-502-2400, or email us at [email protected].
In February 2016, the withholding rate on properties valued over one million dollars ($ 1,000,000) was increased to 15%. If the value of the property is under three hundred thousand dollars ($300,000) and it is being used for residential purposes, no amount needs to be withheld. However, if the value of the property is between three hundred thousand ($300,000) and one million dollars ($ 1,000,000) and it is being used for residential purposes, only 10% of the amount needs to be withheld.
One convenient way of saving and reducing the withholding amount is to use a FIRPTA withholding certificate. Before we look at the ways in which a FIRPTA withholding certificate can help you save money on taxes, let’s learn more about what FIRPTA withholding is.
What is FIRPTA withholding?
It is common knowledge that a FIRPTA withholding certificate can help you save money on taxes. But why is the FIRPTA withholding necessary in the first place?
US law requires every resident and non-resident alien to pay taxes. A resident or non-resident alien must file tax returns if he/she takes part in trade or business activities in the United States. His/her tax returns must show his/her income and the amount of profit made. The following year the individual has to report their income and how much profit he/she has earned. The law does not only apply to individuals, but it also takes into account corporations and businesses.
The withholding of the proceeds of the sale of the property is done by the IRS to motivate the companies and individuals to file tax returns to get back the amount which has been withheld. It is not a real tax imposed on the foreign entities. It is just an amount withheld to ensure that they pay their due share of taxes.
If the amount of tax that a foreign individual or company has to pay is lesser than the amount withheld under FIRPTA, the excess amount is refunded. However, if the amount of the amount to be paid is greater than the withheld amount, the deficit has to be paid by the individual or company. It is the responsibility of the IRS to notify the individual or company to pay the amount that is due.
FIRPTA allows the US government to impose taxes on foreign sellers of property in the United States who are not citizens of the U.S. The coverage of the act can be extended to the transfer of property, exchange, liquidation, and redemption from a non-citizen seller of property.
Details of the taxation rules can be found in the Internal Revenue Code which was created in 1986. The code covers all the details related to the various kinds of taxes that are to be paid by the people or companies doing business in the United States. When a foreign based individual or company sells property in the United States and makes a profit on the trade, the proceeds are treated as taxable income by the legal tax framework of the U.S.
It is incorrect to refer to FIRPTA as a tax because after filing the required tax forms, the amount which exceeds the capital gains tax is refunded. FIRPTA cannot be avoided by any foreign seller, but a foreign seller may apply for a FIRPTA withholding certificate which can help save money on taxes by decreasing the amount that is to be withheld by the foreign seller. This allows the seller to have a greater amount of the sales proceeds when the transaction is closed.
It is a great benefit to get a FIRPTA withholding certificate as it helps you to save money on taxes. It is possible to greatly decrease, or even get rid of the FIRPTA withholding requirement. The process of applying for a FIRPTA withholding certificate to save money on taxes is quite a complicated one. You can hire the services of a qualified professional to help you maximize the reduction that you can get in the FIRPTA withholding.
The withholding amount that is considered is the price at which the property is sold. If the property is owned jointly by foreign and non-foreign persons, the withholding amount is only calculated for the value of the property that is held by the foreign person. If the owners are spouses, 50% of the property ownership is automatically assigned to each. Applying for a FIRPTA withholding certificate to save money on taxes can be beneficial as it further decreases the amount that a spouse has to pay.
If the buyer does not withhold the appropriate amount, the buyer will be liable for the payment of the tax and penalties could also be imposed on the buyer. Although the FIRPTA withholding certificate can help you save money on taxes, all the parties involved must file their tax returns at the end of the year and clearly show the property transaction that was made. It is important for foreign investors to consult their lawyers and tax experts to take maximum benefit from the FIRPTA withholding certificate to save as much money as they can on taxes.
Why do you need a withholding certificate?
The best way to get your withheld money back is by using a FIRPTA withholding certificate which helps you save money on taxes.
A FIRPTA withholding certificate can help you save money on taxes by allowing you, if you are a foreign seller, to receive the withheld amount from the IRS. An application must be filed for the withholding certificate on the transaction day or a day before the final transaction is carried out. The seller must also inform the buyer about the application for a withholding certificate. It is necessary for the seller to submit the following details with the application: the name and contact numbers of both the buyer and the seller and their taxpayer identification numbers (TINs).
It is also important to note that the although the FIRPTA withholding certificate helps you save money on taxes, the obtaining of the withholding certificate does not imply that a tax return does not have to be filed. Upon filing the final tax return, a further tax refund may be made available after taking into consideration the number of owners involved and the amount of time for which the property was held.
Things to keep in mind
It is important to remember to get proof that the seller is exempt from paying the withholding amount. If the claims that withholding does not apply to him, he must be able to produce a withholding certificate to support his claim. In the absence of proof from the seller, do not pay the required tax amount when paying for the purchase.
If an intermediary or agent is hired by the buyer, it is necessary for the agent to verify the authenticity of the seller’s certificate. It would be wise to gain a better understanding of what is required by looking at similar transactions carried out in the past.
How the FIRPTA withholding certificates can help you
There are a number of exceptions to the FIRPTA withholding requirements that lessen the amount that is required to be withheld. The FIRPTA withholding certificate helps you save money on taxes by reducing the amount to be withheld or by eliminating it completely.
The certificate can be granted on the basis of a number of exceptions which allow the seller to pay a reduced amount or to pay no amount of withholding at all. Some of the exceptions to the withholding requirements are mentioned below:
Common exceptions to the withholding requirements
- The most common and well known exception which allows you to get a FIRPTA withholding certificate to help you save money on taxes is when the seller is not a foreigner. The seller must give an affidavit to the buyer to prove that he is not a foreigner. The affidavit must contain information about the name of the seller and the social security number, or SSN, of the seller in the United States. The seller may also give his taxpayer identification number, or TIN, instead of the social security number. Finally, the affidavit must contain the address of the seller.
- Another exception which can grant you a FIRPTA withholding certificate to help you save money on taxes is the personal residence exemption which does not require withholding to be paid if the property being bought will be utilized as the resident of the buyer and if the price at which the property is sold is not more than three hundred thousand dollars ($300,000). For this exception to be available to the seller, it is necessary that the buyer decides to waive the withholding.
- From the 16th of February, 2016, another exception was introduced which involved a reduction in the rate of withholding. Instead of a full exemption, a decreased rate of withholding can now be availed. The reduced withholding rate is kept at 10% of the amount of purchase of the property, if the property being bought will be used by the buyer for residential purposes. This exception is also applicable if the price of purchase of the property is greater than three ($300,000) hundred thousand dollars, but does not exceed a million dollars ($1,000,000).
The personal residence exemption or the reduced rate of withholding exemptions can both be easily availed to apply for a FIRPTA withholding certificate to help you save money on taxes, but these exemptions only comes into play if the buyer or a family member of the buyer wishes to use the property being purchased for residential purposes for at least half the number of days the property is being used by any person during the 2 year periods which follow the closing date.
- These occupancy requirements must be met, or else the buyer would have to pay the IRS the difference between the actually withheld amount and the amount which should have been withheld. The buyer would also have pay interest and penalties to the IRS.
If the seller applies for a FIRPTA withholding certificate to help save money on taxes from the IRS and successfully obtains it, the rate of the withholding requirement can be decreased and, in some cases, it can also be completely done away with. If a buyer wants to make use of this exception, he/she must get a copy of the withholding certificate and retain a copy of the certificate in his/her record for a period of five years.
- A foreign company or a single-member limited liability company can also avail the benefit of a FIRPTA withholding certificate to help save money on taxes by selecting an option on the IRS withholding form which allows them to be taxed as a domestic corporation. This saves them from paying the withholding amount because companies which are considered as domestic to the United States do not have to follow the withholding rules set by the FIRPTA and they will not have to pay the amount required to be withheld under FIRPTA.
The foreign firm must be registered as a domestic corporation to avail this exemption. The foreign company can avail the exemption by filing Form 8821 with the IRS. After the IRS has approved their application, the seller must inform the buyer of their status and the buyer will have to keep a copy of the IRS approval in his/her records for a period of five years.
A few lesser known exceptions:
- A FIRPTA withholding certificate to help you save money on taxes can also be applied for if the transfer of the property is made as a gift and no monetary transaction is involved in the transfer.
- Another exception to the withholding requirement is when the buyer is a state entity or a state run body. In this case, the seller will not have to pay any withholding.
- If the amount received from the sale of the property is not enough for the FIRPTA withholding, the seller of the property will have to apply for an exemption or a reduction in the withholding from the IRS. The process for applying for a FIRPTA withholding certificate to help you save money on taxes is not a quick one and it requires time.
The FIRPTA withholding requirements only consider the price at which the property is sold and not the proceeds of the seller. If the seller does not get sufficient proceeds, the exemption is not automatic and it is necessary for the seller to apply for the exemption.
What foreign sellers should not forget
The application for a FIRPTA withholding certificate to help save money on taxes is the best option for foreign sellers, but they should be completely aware of the conditions under which the withholding requirement is exempted. If you are eligible for a withholding certificate, inform your buyer and fill out the application form for securing the withholding certificate. The IRS grants a withholding certificate within 90 days of receiving an application. If the IRS does not grant a withholding certificate, the withholding amount must be given to the IRS within 20 days of the notification of the application denial.
For the timely release of funds, the information about the buyer’s name, address and SSN (or ITIN in the case of non-residents) is necessary. If this information is not provided, the application for a Withholding Certificate and early refund will not be accepted. Necessary information about the filing of an application for getting a FIRPTA withholding certificate to help you save money on taxes can be obtained from the IRS. If you find the application procedure to be complicating, you may contact a professional tax agency for professional advice.
If you need help with your FIRPTA tax withholding certificate, please call us at 407-502-2400, or email us at [email protected].