Florida, Michigan, Ohio, California and various other states in the US are dream investment opportunities for property buyers. Although these markets are very tempting for both native and foreign buyers, but in case you are new to the whole ordeal, you’ll learn that anywhere in the US, the talks and dealings of a property are never complete without raising the point of FIRPTA.
If you need help with FIRPTA Tax Withholding, please call us at 407-502-2400, or email us at [email protected].
In fact, most buyers, sellers and real estate property agents will ask you the question the second you show any interest in the property. And it should be that way or else, at least one party will suffer the consequences in terms of financial loss.
Before we move on to more intricate details on the subject, let us first understand what FIRPTA is, why is it necessary, who is liable to sign it and far more importantly, how to get FIRPTA withholding back? The process may seem like all twists and turns, but it is hardly so. All we need to do is understand some basic terminologies, understand the procedure and follow it. Property managers do it day and night, several times in a day actually. Just read on and you too will become an expert on the subject:
For a brief summary to understand what FIRPTA is and how to get FIRPTA withholding back, here’s what you need to know. You might have noticed that whenever someone is buying property or and have already bought it and are preparing to settle, they will show deep concern regarding FIRPTA and ask whether they have dealt with a Foreign investor or a native investor. Whether yes or no, in either case, it is required that the FIRPTA affidavit must be signed.
If the other party is not making a foreign investment, then they can sign the affidavit and that’s it. In case the other party is part of a foreign investment program, then they are liable to follow the Foreign Investment Real Property Tax Act by IRS and will have to pay an additional 10-15% of the sale price to the IRS who will hold it and after the procedure have been done and completed, this withholding amount can be attained back. Which leads us to wonder how to get FIRPTA withholding back? Let’s learn it step by step.
Understanding Foreign Investment Real Property Tax Act 1980 by IRS:
The United States of American has sanctioned one definite authority to deal with all the things regarding taxes. The Internal Revenue Service (IRS) has the influence on all legal tax acts, and is the law enforcer and tax collector since 1st July 1862. According to the IRS, FIRPTA is defined as:
“Withholding of Tax on Dispositions of United States Real Property Interests. The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.”
Those are the formal words stated under the Foreign Investment Real Property Tax Act (FIRPTA). In not-so-formal words, FIRPTA states that all those investors who are not permanent citizens of the US and are foreigners selling property in the US, must pay a fix percentage of income tax on the gross sales amount. And who is to make sure that they do this? It will be the buyers, of course. The buyers will have to make sure whether they are dealing with a foreigner or a citizen and in the former case, they’ll be the one to collect the withheld amount and pay it to the IRS. This amount is the tax the state is entitled to, from the foreigner’s earnings.
Understanding FIRPTA Affidavit:
FIRPTA affidavit is a very important document that must be involved in all property dealings, regardless of the foreign or non-foreign status of the seller. It is the responsibility of every personal property dealer to learn extensively about the procedure before getting involved, Partaking in illegal activities or failing to abide by the states’ rules and laws will land them in trouble later; it is also their moral duty.
FIRPTA affidavit has to be signed by the seller agreeing to the proclamation that they are in fact native and are not subject to FIRPTA withholding tax.
Purpose behind the FIRPTA Affidavit:
FIRPTA affidavit is basically an exemption technique used to assure that the seller is not foreign and thus, saving them from additional payment of withholding tax. FIRPTA affidavit was basically introduced by the IRS to save the natives and the foreigners from being swindled. The native must sign the affidavit or else the buyer will take an unnecessary amount from the seller or the seller will fail to receive the payment when necessary. In the later scenario, the penalty will have to be paid by the buyer.
FIRPTA affidavit secures the position of both parties and makes the property dealing process safe and organized. FIRPTA Affidavits also subsist to ensure that every U.S citizen and non-citizen is paying the taxes they are obliged to, on the profit they are earning on the soil of the US. Therefore, the obligation of learning about FIRPTA lands on both the buyers and the sellers of the property.
FIRPTA rate is the tax percentage a foreign seller is liable to pay to the IRS on selling of a property. The rate has been 10% of the gross sales amount prior to February 2016. However, the tax amount of Foreign Investment in Real Property Tax Act has been revised after that and at the current moment, the fixed rate of the withheld amount is 15%.
This is the duty of the buyer to hold this percentage of the total gross sale and consequently report this sale along with the deducted amount to the IRS. There are however, exceptions to this statutory amount in case the IRS form 8288-B has been used and presented.
In case there is a settlement agency involved between the dealings, then they are the ones to carry out the procedure. Although the responsibility falls on them but even then, it is the buyer who will be held responsible for it. Here are some basic points regarding the Foreign Investment in Real Property Tax Act:
- There will be no need for withholding any sum of amount or remission when the selling price of the property is less than $300,000 or equal. This is also applicable when the buyer is using the property as their residence.
- Another law states that in the scenario where the selling price exceeds $300,000 but stays within the limit of $1,000,000 and the buyer is using the property as a residence, then the amount to withhold will be 10% of the gross sales amount.
- When the sale price of the property exceeds $1,000,000, then the withheld amount will be 15% of the total sales amount, regardless of the manner in which the property is being used.
- In accordance to the law, the buyer is the withholding agent during the property transaction and will be held responsible for withholding and remitting the accurate amount for the IRS with respect to the aforementioned conventions.
- If the buyer failed to abide by their duty or did it improperly, then they will be the ones liable to pay any sort of penalty, interest, and additional withholding tax if their intent is challenged by the IRS at a later date.
How to Get Back FIRPTA Withholding?
Now let’s move on to the perplexing matter of learning how to get FIRPTA withholding back and understanding the even more confusing ordeal: Why should they be getting it back in the first place? Here’s what we need to understand.
The IRS takes the withheld amount because the wheels of the state rotate with the taxes and every resident and non-resident alien is liable to pay their taxes as the laws and regulations of the United States of America demand it. While most think it unfair that only foreign investors are subjected to the withholding rule as opposed to the natives; that is not the case. The means are different but both of them have to pay the taxes they are subjected to.
Any native living in the US who does trade and business has to file tax returns every year and inform the IRS about their earnings. The foreigners trading and doing business in the US have to do the same but because they are foreigners and cannot be traced, or tracked back to another country, so what the IRS does is withhold this amount to ensure that the foreigner does file their tax return on the earnings that they made in the U.S. When the foreigners abide by the law and do so properly, they get their withheld amount back. The FIRPTA is just an assurance for the IRS that they pay their taxes in complete and on time, after which the amount is returned to them.
However, the foreigners will have to go through a simple procedure to attain their amount back as the IRS does not return the amount back until and unless the foreigners apply for it. Here is how to get FIRPTA withholding back:
Get a Withholding Certificate from the IRS:
Learning how to get FIRPTA withholding back is simple enough. Just begin by filling the application soon after the transaction has taken place or a day after the transaction has closed in full and receive the Withholding Certificate. The application for FIRPTA Withholding Certificates can be found on the official website of the IRS. The foreigner will have to fill form 8288-B. This would be the Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests to apply for a withholding certificate.
It is imperative that this application form must be filed within days of the transaction. The form requires information on the seller as well as information of the buyer, which means eventually the buyer also gets to learn that the application for the withheld amount has been sent to the IRS. The IRS, upon receiving the application, goes through the document of the foreigner along with checking theory tax return and payments and then, after giving a green light, the closing agent who is responsible for keeping the withheld amount hands it back to the foreigner.
The application process however, requires some preparations and makes the attachments of the following information necessary:
- Receipts of all the repairs and upgrades that took place on the property.
- Legal name and contact numbers of the buyer
- Legal name and contact numbers of the seller
- Taxpayer Identification Number of the buyer
- Taxpayer Identification number of the seller
- Settlement statements from the purchase of the property
- Proofs of income received and expenses incurred
- Preceding year’s tax returns
- Passport size pictures of the seller
- Receipts and invoices of furniture and other fixtures
The amount is usually returned back to the seller within the time frame of 90 days after the date of closing. There is also a chance of the application being rejected either because the tax return have not been paid in full or because the tax to be paid is equal to that of the withheld amount and the IRS has nothing left after deductions to return back. Scenarios in which the IRS will surely pay back are the following:
- When the withheld amount is more than the tax liable to be paid by the foreigner. After the deduction has been made, the IRS returns the withheld amount.
- According to the US laws, there are some exemptions. If the seller falls into one of those categories, then they’ll be paid back the withheld amount.
- Most effectively, the amount is paid in full when the seller goes through the proper procedure of tax returns and pays their tax in full. The primary purpose of the IRS is to get the foreigners to clearly report their income without any disparities. If they succeeded in doing that, then the IRS will follow through on their word and pay the withheld amount back in full.
Remember that the withholding certificate must not be older than 30 days after the date of transfer. It is advised that the application for the certificate must be applied for, just the day after the transaction to expedite the process and this is the proper procedure of learning how to get FIRPTA withholding back.
Amount to be returned:
It is not necessarily important that the IRS will pay the withheld amount in full and they have their justified reasons behind it. Assuming that the foreigner has not filed their tax return, the IRS will compare the two amounts; the tax the foreigner is obliged to pay and the withheld amount in possession of the closing agent.
If the withheld amount is more than the tax payable, then the IRS will return the extra amount back to the non-resident alien. In the opposing scenario where the tax payable is more than the withheld amount, then the foreigner is asked to pay the outstanding tax to the IRS.
FIRPTA Withholding Act Exceptions:
Some cases termed as exception in the FIRPTA law state that certain individuals are not subject to 15% payment of the withheld amount. These exceptions do not however rule out the duty of filing tax returns. Following are the exceptions of 15% payment of the withheld amount:
- When the foreigner has conducted certain transactions where they are not required to report the profit nor the loss that occurred during the transactions.
- These transactions that exempt the foreigners from withholding include reorganizations of corporations, liquidation of an organization or exchange of properties without involving money.
- When the selling amount has been less than $300,000 and the buyer is living in the property and using it for personal use, then there will be no amount to withhold. The time spent in the property could just be 50% for two years.
- In case it is the seller who brings a withholding certificate for the seller, then the withheld amount will be waived off or reduced considerably.
- When the property is a gift from the foreign seller to the native individual and no money is involved in the process.
- When the buyer is from the state entity or in a division under a state-run department, then they will not be obliged to withhold any amount from the seller.
Please note that the aforementioned rules and exemptions and the ones mentioned by the IRS extensively on their website are the only ways to get exempted from the withholding tax. There are fraudulent means and fake documents that people use to bypass the law by unfair means. While that process is easier and convenient, it will mean never being able to trade or do business in the US for fear of getting caught or not being trusted by buyers anywhere. You know now how to get FIRPTA withholding back and the process is simple and easy, the amount you pay will be returned back to you. You just have to follow the rules and enjoy your trade and business free of guilt and fear.
If you need help with FIRPTA Tax Withholding, please call us at 407-502-2400, or email us at [email protected].