When people reside in the United States, the law requires them to pay taxes. Whether a person is a foreigner or a local, they have to pay taxes. But it is more difficult for people belonging to different countries as they come to the United States struggling hard by obtaining visas. Such people either come to start, develop, and direct a business, or just to work in the United States. Also, some people come as principal investors. No matter who they are, they need to pay income taxes on dispositions of interests in the United States real estate i.e. United States real property interests.

When it comes to paying taxes, they need to obtain Tax ID numbers, i.e. ITIN, SSN or EIN. Domestic or local people are required to pay off the taxes with their regular income while the foreign people are taxed on certain items of income such as effectively connected income, source income etc. On the contrary, foreign individuals are not really taxed on capital gains but they are definitely taxed on the disposition of an interest in the United States real property as subject to federal income tax. The details are provided in the internal Revenue Code systems 897 along with the new modifications.

When we refer to taxes for real estate properties, we are talking about FIRPTA particularly. It is for foreign investors. As they say, two things in life are inevitable, taxes and death. People want to avoid these taxes as a result they are asking how to avoid FIRPTA withholding. As per the new law, FIRPTA requires buyers of the United States real estate property to keep back 10% of the sales price. Such sellers may want to minimize it to the estimated tax amount for which they require forwarding an application. If you want to know how to avoid FIRPTA withholding, keep reading this blog.

We can also help you get a withholding certificate so you do not have to pay the FIRPTA 10% tax. Please call us at 407-502-2400, or email us at [email protected] for more information.

What is a FIRPTA?

Prior to understanding how to avoid FIRPTA withholding, you need to understand what FIRPTA really is. Along with various other international tax issues with respect to holding of real property interests, one the laws is FIRPTA i.e. Foreign Investment in Real Property Tax Act. It claims deductions for trade and business operations and serves local tax issues or real estate property interests such as transfer laws. To be more specific, it is a federal law governing the taxation and withholding by foreign people who are dealing and selling United States’ real estate properties.

In the year 1980, the United States Congress enacted the Foreign Investment in Real Property Tax Act. This law affirmed that the Internal Revenue Service (IRS) has the right to tax on the gains of the real estate properties or income from the sale of the rental properties. The ones who are asking how to avoid FIRPTA should also know that there was no law before FIRPTA, and the United States government had no way to tax the benefits of the foreigners.

FIRPTA laws have significant costs to foreign investors in the United States real estate. Under FIRPTA, a foreign investor who holds a passive investment with any type of net lease are required to withhold at least 30% of the gross rental income including all the expenses tenants must pay. Not only this, when a buyer purchases United States real estate from a foreign seller, the buyer must ensure that 10% of the purchase price is withheld. For this reason, most the people do not want get those costs on hold and often ask how to avoid FIRPTA withholding. When they withhold the amount, the Internal Revenue Service (IRS) collects the tax revenue. After disposing the real estate, the seller will have no connection with the United States. This 10% hold on money represents a significant amount on your property. Also, they have to transfer the 10% amount to the escrow account.

Most of the foreigners find this law very expensive as a result they ask how to avoid FIRPTA withholding. This regulation has put many into losses but the ones who are asking how to avoid FIRPTA withholding, they must keep in mind that there is a way they can secure themselves from FIRPTA withholding, as they can apply for withholding certificates. With these certificates, they can reduce 10% of withholding so they need not worry about how to avoid FIRPTA withholding, anymore.

Foreign Person Under FIRPTA

No doubt FIRPTA can be really very costly which is why most of the foreigners in the United States are concerned about how to avoid FIRPTA withholding. The ones who really want to understand how to void FIRPTA withholding, they first need to know who are the eligible foreigners defined under FIRPTA. Let’s have a look at them below.

  • Foreign estate
  • Trust
  • Partnership
  • Foreign corporation
  • Non resident alien individual

Are You Pondering How to Avoid FIRPTA Withholding? Remember to Keep These Things in Mind For FIRPTA First!

FIRPTA is really important for everyone to understand. Specifically, it is very important for foreign national who have property in the United States. So if you want to know how to avoid FIRPTA withholding, you must keep the following things in mind first.

  • If you are a foreign person, you will be required to insure 10% of the sales price. They are withheld by the Internal Revenue Service (IRS) for the seller’s tax obligations. You must not forget that some states have additional withholding requirements.
  • US green card holders, US citizens, and non-citizens who fulfill the requirement of the substantial presence test are not bound for FIRPTA.
  • If the seller is a foreign person and purchases a house for less than $300,000, it will be the primary residence of the buyer and FIRPTA will not apply on them.
  • If you are concerned about how to avoid FIRPTA withholding, remember that you can withhold less than 10% but it requires approval from the Internal Revenue Service (IRS) and it can take several months. Such reductions are only granted for:
    • A tax free sale (section 1031 exchange)
    • Sale at a small profit or a loss
    • Sale of currently inherited property

We can also help you get a withholding certificate so you do not have to pay the FIRPTA 10% tax. Please call us at 407-502-2400, or email us at [email protected] for more information.

Change in Withholding Rate – 10% to 15%

In most of the cases, the purchaser of the United Sates real estate property is allowed by the law to deduct 10% of the amount from a foreigner. Just like all other laws modify, FIRPTA withholding law also revised in the month of February, 2016. One section 324 addresses that the FIRPTA rate has increased from 10% to 15%. The withholding rate still applies to the sale of the property where the amount is either $1 million or more than that. Now people who are already worried about how to avoid FIRPTA withholding are concerned more than before as it can put them into losses.

How to Avoid FIRPTA Withholding?

Now since the foreigners will be required to pay 15% on the purchase price instead of 10%, it can be very costly for them. Due to this reason, they are looking out for ways to avoid them and ask how to avoid FIRPTA withholding. They can do it by applying for Withholding Certificates. But foreigners must keep in mind that by applying for this certificate, they cannot entirely eliminate the requirement to file final United States income tax return in order to report the sale transaction. However, it can reduced to some extent which can lower the burden of foreigners and will not b every costly than before.   Foreigners who are asking how to avoid FIRPTA withholding must read this section carefully.

In order to avoid FIRPTA withholding, foreigners need to apply for the Withholding Certificates. So in order to learn the core of the question, how to avoid FIRPTA withholding, you need to understand the details carefully that are provided below.

Obtaining a Withholding Certificate Before the Sale

When a foreigner has Withholding Certificate is in hands, one may be able to reduce or completely eliminate (sometimes) the withholding requirement. Either the buyer of the seller, anyone can apply for the Withholding Certificate to the Internal Revenue Service (IRS) i.e. 26 CFR 1. 1445 – 3 (a). It is better to obtain a Withholding Certificate before the sale as they can withhold a reduced 10% amount of the sale price but a pending application cannot let this happen.

Issuance of Withholding Certificate

A Withholding Certificate is issued to minimize the rate so that the Internal Revenue Service (IRS) does not charge much interest and results in lower costs. This certificate is issue due to the following reasons.

  • A declaration by the IRS that the reduced withholding is suitable because either the amount is withheld by the transferor’s maximum liability or the withholding amount will not put the collection of the taxes at stake.
  • The exemption from the United States tax of all gain has been realized by the transferor
  • An agreement for the payment of tax providing security for the tax coverage by the transferor or transferee.

Forms You Require for Obtaining Withholding Certificate

The Treasury Department regulations provide sample certifications. They are basically used to obtain exemptions from withholding. The certification must state that the non resident alien for the purposes of United States income tax and declare that the certification is made under the penalty of perjury. The buyers who are concerned about how to avoid FIRPTA withholding must remember that they need to file the IRS forms 8288 and 8288 – A, and 8288 – B.

These forms must be provided to the buyer with a stamped and sealed copy to the IRS. The sellers are required to attach the forms with the tax return and any tax withheld will be credited against any tax due. In addition, the seller can use 8288 – B forms to either obtain a determination of the amount or the determination that no withholding is required. In order to know more about avoidance of FIRPTA withholding using form 8288, check out this link.

We can also help you get a withholding certificate so you do not have to pay the FIRPTA 10% tax. Please call us at 407-502-2400, or email us at [email protected] for more information.

Application Process – How to Avoid FIRPTA Withholding?

The application process of the FIRPTA withholding must be signed by an individual or it should be duly authorized by an agent or a responsible officer. You need to follow the steps listed below in order to determine how to avoid FIRPTA withholding.

·       Step # 1: Determination of FIRPTA

The first and foremost step to avoid FIRPTA withholding is to see whether it applies or your transaction or not. You can determine it with the help of the following factors.

  • If you are a foreign person selling a United States property interest.
  • If you have any exceptions to FIRPTA withholding application.

·       Step # 2: Tax ID Number

The second step is to obtain a Tax Payer Identification Number (Tax ID number) from the IRS. The individuals who are filing form W – 7 needs to obtain Individual Taxpayer Identification number (ITIN) or a Social Security Number (SSN) depending upon their status while businesses need to obtain form SS – 4 to get Employer Identification Number (EIN).

·       Step # 3: Applying for Withholding Certificate

Foreigners who are asking how to avoid FIRPTA withholding, they must follow this step properly. They must apply for a Withholding Certificate by filing IRS form 8288 – B. The application must be signed and stamped by the individuals. The application must cover the following information.

  • Name
  • Address
  • Taxpayer Identification Number
  • State if the person is the transferor or transferee
  • Name, addresses and TIN of all other transferors and transferees
  • Type of interest
  • State of transfer
  • Contract price
  • Location and general description

After ensuring that all the information is being placed and put in the form, you are required to send the form via mail at the following address.

Internal Revenue Service Center

P.O. Box 409101

Ogden, UT 84409

·       Step # 4: Notify the Transferee

Once you have submitted the application form, you are now required to notify the transferee of your property that you have applied for the Withholding Certificate, so that they wait for the approval and grant you compensation.

·       Step # 5: 1031 Exchange Agreement

Before closing the property sale, you are required to enter into a 1031 exchange agreement. Also, you must ensure that you form this agreement with a Qualified Intermediary such as the 1031 Exchange Experts. These intermediaries are credible and facilitate complicated and complex kind of exchanges. The Qualified Intermediary must take the charge of proper compliance with filing requirements and FIRPTA withholding and as a transferee or a withholding agent.

·       Step # 6: Completion of Qualified Intermediary

In order to know properly understand how to avoid FIRPTA withholding; you must not miss this step. You need to properly complete your Intermediary Exchange by buying new property through Qualified Intermediary. You must make sure about the following elements.

  • You have to ensure that the value of your replacement property or properties is either equal or greater than property you sold.
  • You have to make sure that all the net proceeds of your sale are applied to the purchase of replacement property in your exchange.

·       Step # 7: Reporting

In the end, you must not forget to report your sale and exchange to the Internal Revenue Service (IRS) in the United States tax return for the tax year of your sale.

Limitations and Exemptions of FIRPTA Withholding

Like all other things there is a set of requirements. Similarly, every buyer withholds a portion of sales proceeds to every real estate transaction until and unless, it meets any one of the following.

  • If you want to know how to avoid FIRPTA withholding, as a seller you need to present an affidavit which states that penalty of perjury is not a foreign person and it provides the seller’s United States taxpayer identification number i.e. basically a social security number (SSN).
  • The transfer must be of an interest in a non public traded domestic corporation where the company provides the certificate stating that the company is not and has been not been a United States’ real property which holds corporation or as of the date the transfer.
  • When a buyer receives a qualifying statement which is issue by the Secretary of the Treasury declaring that the foreign seller is arrange to pay the tax or is exempted from the tax imposed.
  • The buyer needs to own the property for use as a personal residence and the price of the sales must not exceed $300,000 or the interest transferred is regularly traded on an established security market.

The ones who are asking how to avoid FIRPTA withholding, they must also remember that he first two exemptions mentioned above, will not be applied if the buyer has genuine knowledge that the certificate is not true or an agent of the buyer declares that the affidavit is false. Also, if the Secretary of the Treasury asks for a copy of the certificate and the buyer fails to provide it, the withholding exemption will not apply.

Final Thought

Buyers of the real estate property and the attorneys for buyers and sellers need to be very cautious of the consequences of the tax that FIRPTA creates. It is actually a very critical matter to determine that the foreigners will be granted exemption of not because most real estate transactions do not require buyers to withhold funds because the seller will be a United State citizen. So, always see to the requirements of the FIRPTA withholding and make decisions accordingly. Now that you know how to avoid FIRPTA withholding, you can make an informed decision. Good Luck!

We can also help you get a withholding certificate so you do not have to pay the FIRPTA 10% tax. Please call us at 407-502-2400, or email us at [email protected] for more information.

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