What is FIRPTA Withholding?

FIRPTA stands for Foreign Investment in Real Property Tax Act. It was passed in 1980 and it basically underlines the rules of buying and selling interest or share in real property inside the US by foreign sellers.

The act authorizes the United States to levy taxes on those sellers who are not US citizens or nationals, and wish to sell the partial interest in the real property they own. These include the non-resident aliens; people who do not have the US green card. Selling is not the only action that warrants taxation or withholding; the phrase that IRS has categorically used for the purpose is ‘disposition of US real property interests’. This could include transfer of property, liquidation, exchange and redemption among others; all from an international seller. The details of the purpose of disposition have been outlined in detail in the Internal Revenue Code.

We can also help you get a withholding certificate so you do not have to pay the FIRPTA 10% tax, or if you already paid the FIRPTA tax, and don’t wish to wait to file your tax return to get your money back, please call us at 407-502-2400, or email us at [email protected] for more information.

Internal Revenue Code in Relevance to the FIRPTA

The Internal Revenue Code (IRC), put forward in 1986, is the central code wherein all the taxation rules are laid down in detail. Whether it is the income, excise, estate or payroll taxes, everything is detailed as to how different categories of taxes have to be treated. When separated from the entire United States Statutes, the code is called Title 26 of the United States Code. The implementation of the code is the responsibility of the Internal Revenue Service (IRS).

Under the IRC, a federal income tax is supposed to be paid by individuals or entities residing and functioning in the US who earn taxable income as per the brackets defined by the IRS. This includes citizens, corporations, estates and properties.

When a foreign entity transfers interest in property as a seller, he is basically gaining profit on that sale which is treated as taxable income by the taxation laws of the US. FIRPTA is what defines those laws for these kinds of transactions where the seller is a foreign person or entity doing business inside the United States. Simply put, it lays down the taxation conditions on capital gains made by transferring interests in real property that you may own as a foreign seller.

This act is applicable to the ‘Real’ property which includes natural resources such as wells, mines, and agricultural and housing land among others. Additionally, all such property that has been used to maximize profits or is related to the real property also falls under the spectrum of FIRPTA. This also includes the machinery used to work on and improve the natural resources the seller owned.

Conditions of FIRPTA Withholding

  • The entity responsible for withholding is the buyer himself.
  • At the time of payment, the buyer is supposed to withhold 10% of the amount the seller has realized. If the buyer fails to do so, he is held responsible for the payment of the exact amount under the FIRPTA to the IRS.
  • As of February 17th this year, the withholding rate has been raised to 15%.
  • It is the responsibility of the buyer to preemptively find out if the seller is an international one or not. Individual buyers could also hire withholding agents or settlement agents to do the job for them.
  • For entities such as foreign corporations, trusts, estates or partnerships, the amount supposed to be withheld by the buyer is 35% of the value realized by the seller corporation.
  • If the real property or corporation being disposed has both foreign and local owners, the realized value is divided in accordance with the capital amount each contributed into it.
  • The act is not applicable to sellers which are resident aliens; the people who reside in the US permanently but have not yet become citizens. This mainly includes the current Green card holders or those who have held one in the past year.
  • If the buyer is purchasing real estate from the seller, he needs to fill the forms 8288 and 8288-A, and submit them to the IRS. The purpose of these forms is to report the withholding amount of the purchase and then pay it to the IRS at the right time.
  • The realized amount is the total of the principal amount paid, the market value of property already transferred or to be transferred in the future that has not been paid for as yet and the value of liabilities that are attached with the respective property. Correct amount of withholding is calculated as 15% of the sum of all three.
  • The buyer is supposed to transfer the withheld amount of 15% on sale price to the IRS within 20 days of deal closing.

How to Get Back FIRPTA Withholding?

Before looking for ways to get your FIRPTA withholding back as a foreign seller in the US, it is important to understand why it is taken. Every resident as well as non-resident alien is subject to taxation as per the US laws. If a non-resident alien is involved in trade and business, such as selling a property in this case, he is required to file tax returns the following year to report his income and how much he has earned. Similarly, a resident alien engaged in business or trade inside the US is also required to do the same.

This act of withholding 15% of the sale price, subject to the non-resident aliens, is done by the IRS to compel those businesses to file proper returns the following year in order to get that money back. It is not the actual tax amount due on them; it is the money that is held back from them as an assurance that their taxes will be paid on time.

As a general rule, the withholding amount is compared with the tax that is due from the respective seller. If that amount is greater than the tax due on him, he is refunded the extra. On the contrary, if the amount is lesser than the due tax, he is given a notice to pay the outstanding to the IRS. The basic idea is to keep the tax liability of the foreign sellers in check so that any discrepancies can be adjusted in the following tax year.

Some other ways you can get back all or part of your withholding from the IRS are discussed in detail below.

We can also help you get a withholding certificate so you do not have to pay the FIRPTA 10% tax, or if you already paid the FIRPTA tax, and don’t wish to wait to file your tax return to get your money back, please call us at 407-502-2400, or email us at [email protected] for more information.

Get a Withholding Certificate from the IRS

Withholding certificate is the most structured way to get back the money held back from you as part of the transaction. The certificate is issued by the IRS only after you file an application with all the details required by the IRS. The application is supposed to be filed on the day of the transaction or a day before the final transaction is made. Additionally, the buyer must also be notified of the fact that you are applying for a withholding certificate. This is inevitable because application requirements include buyer information as well.

In order to apply the correct way and make sure that your application is accepted and worked upon, the following attachments must be there;

  • Legal name and contact numbers of the buyer
  • Legal name and contact numbers of the seller
  • Taxpayer Identification Number (TIN) of the buyer
  • Taxpayer Identification number (TIN) of the seller

Generally, it takes a period of about 3 months for the IRS to process and work on the application after which it issues the Withholding Certificate. The ownership of that certificate by the seller then implies that the buyer entity will have to release the due amount and give it back to the seller.

This application is only for the purpose of getting the withheld amount back. It in no way frees you of the responsibility to file tax returns the following year, which is an absolute requirement no matter what other applications you might be filing.

The issuance of the withholding certificate can be due to any of the reasons given below, aptly justified by the seller:

  • The IRS is convinced that releasing the withheld amount is appropriate because either the amount is exceeding the maximum tax applicable on the seller or the tax collection process would not be negatively affected from the reduced amount of withholding.
  • The seller is justifiably exempted from the tax under the US tax laws.

Provide a Proof of Your Income from the Transaction

Another way you can get a part of the withheld amount back from the buyer is to provide a proof of your correct income from the transaction by filing a detailed tax return with the IRS. The underlying purpose is to clearly report your income without any discrepancies, so your dues can be released on time. Therefore, the best way is to file returns on a basis of single return per owner which tells the respective amount of sale and the capital gain on it.

Exceptions to the Withholding Act

There are quite a few exceptions to the FIRPTA Withholding defined by certain situations. This is to say that you are not liable for the extra 15%, but you still have to file returns and notify the relevant authorities of the transaction nonetheless.

  1. You have sold the property for less than $300,000 and the buyer intends to reside in that property for at least 50% of the time in the next 2 years. This could also be in intervals; residing consistently for half the time is not a compulsion.
  2. As a seller, if you are able to provide the certificate of Non-Foreign Status, which establishes your status as a citizen or a resident alien, you will be exempt from the withholding. Although the buyer is not absolutely required to confirm or investigate about the validity of this certificate, he will be held responsible in case he knew that the certificate has been received through unfair or fraudulent means.
  3. The buyer himself gets a withholding certificate for the seller, which minimizes the amount of withholding or completely waives it off.
  4. You have transferred the property as a gift; meaning that there is no monetary transaction involved in the transfer.
  5. If the buyer happens to be any of the State entities or any division that is possessed by the state or is run by any department of the state, the seller will not be required to get any percentage withheld from him.
  6. There are certain transactions wherein the seller is not required to report any gains or loss made from the transaction, exempting him from withholding. These include corporate reorganizations, liquidations or non-monetary exchanges of property. The situations where reporting the gains or losses is not compulsory is where the seller becomes automatically exempt from any withholding.
  7. The property that is being disposed, or transferred, is basically a part of the interest in a domestic or locally run corporation. Since the act is applicable to foreign sellers, the property being part of a domestic corporation is exempt from the effects of FIRPTA.
  8. The domestic corporation, of which the transferred interest is a part, issues you a certificate whereby it is proved that the interest being transferred is not a US Real Property interest. Please note that it can only provide you with this certification if the corporation did not fall under the category of US Real Property Holding Corporation (USRPHC) in the past 5 years.

Other conditions which must be met for issuing this certification are detailed below.

  • According to the section 897 of the Internal Revenue Code, the interest must not have fell under the category of US real property interest as of the date of disposition.
  • The certification must not have been more than 30 days prior to the date of transfer.
  1. The realized amount on the transfer of the property interest is zero; meaning that no loss and no profit has been reported by the seller.
  2. Transferors that fall under publicly traded partnerships having stocks in the stock market or trusts are not liable of any amount being withheld from them.

Things to Remember When Buying From a Foreign Seller

If you are buying an interest in any real property or US Real Property corporation from a foreign seller, it is important to keep some crucial aspects in mind before finalizing transactions. Some of these have been given below.

  1. If the seller says that he is exempt from the withholding, it is important that the buyer gets hold of the proof in the form of exemption certification that the buyer has obtained from the IRS. If the seller does not provide sufficient proof, it is essential to hold back the required amount of tax when making the payment.
  2. If the buyer has been taking the services of an intermediary or an agent who has the knowledge of the exemption certificate being false, it is the responsibility of the agent to notify this to the seller who can then contact the IRS.
  3. It is good to have a look into similar past transactions of the seller you intend to buy from.

Things to Remember As a Seller

If you are a foreign seller, working trading and doing business inside the United States, keep the following points of importance in mind before carrying out withholding transactions and applying for exemption certifications;

  1. Read the conditions of exemption in detail before applying for one, so that no time is wasted in processing of wrong applications by the IRS.
  2. Be vigilant of the time frames that have been outlined by the IRS for sellers who wish to apply for various kinds of certifications. The dates they give are very important to follow.
  3. Remember that the provision of exemption does not negate the need of filing returns. Filing income tax returns is still obligatory the year following the transaction.
  4. It is good to give a thorough read to the conditions laid down by the Internal Revenue Code to avoid any discrepancies and ambiguities regarding the transactions and exchanges in the future.

We can also help you get a withholding certificate so you do not have to pay the FIRPTA 10% tax, or if you already paid the FIRPTA tax, and don’t wish to wait to file your tax return to get your money back, please call us at 407-502-2400, or email us at [email protected] for more information.

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