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September 14, 2023 
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0 comments The Ultimate IRS FIRPTA Withholding Guide For Foreign Real Estate Investors
DISCLAIMER
This video is intended for educational purposes and should not be taken as legal, financial, or tax advice. You should consult with a professional about your unique situation before acting on anything discussed in these videos. Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. are providing educational content to help small business owners and individuals become more aware of certain issues and topics, but they cannot give blanket advice to a broad audience. Neither Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. nor its members can be held liable for any use or misuse of this content.
Transcript:
Hello, my name is Robert Acevedo. Thank you for joining us today. I am an enrolled agent here at Freedom Tax. We are bringing you the information in this video today about the topic of FIRPTA withholding. FIRPTA is something that we specialize in, FIRPTA withholding. We have a lot of foreign clients, and we get a lot of calls about it. We wanted to take the time today and do a bit of a deep dive into what it’s all about, how can we assist, and make sure that you stay with us till the end, because I’m going to go over the four most frequently asked questions or misconceptions regarding FIRPTA. Excellent. Let’s begin. FIRPTA withholding is, as I said, it’s a topic that it’s very common to us here in the office. We’re located here in being located in Central Florida. It’s a service that we get to practice a lot for our clients. Let’s go over what the basics of FIRPTA are. What is FIRPTA? FIRPTA is an acronym for Foreign Investment in Real Property, Tax Act. It’s a federal law that applies to foreigners, foreign persons, and foreign withholding when they sell real estate in the United States, specifically.
What I always like to mention about this, or the example that I like to give is, as a US person, when they sell US real estate, they don’t have to worry about any upfront withholding from the point of view of the IRS. The US government gives the benefit of the doubt to a US person. When they sell real estate, they don’t have to worry about any taxes being taken at the point of sale. This FIRPTA applies to foreigners. A foreign person is not giving that same benefit of the doubt. When a foreign person sells US real estate, the IRS says, Well, we’re going to require a little bit of some upfront, and it’s not a little bit. It can be a pretty sizable amount right when the sale occurs. We’re going to dig into that now. Specifically, what the IRS says is a foreign person is going to have a 15% withholding of the gross sales price. Why does the IRS do this? Because the IRS doesn’t want to be put in a position, and it makes sense, right? They don’t want to be put in a position where a foreigner, let’s say, that sells, closes on a house, and no taxes are withheld upfront.
Well, there’s a good chance that the withholding, if nothing is withheld upfront, that a foreign person could sell. Proceeds from the sale could be taken out of the country. Then the IRS has no recourse, no ability to make a foreign person responsible to pay taxes on any gains that they had. That’s why the IRS says, well, Mrs. Foreign Seller, we’re going to make sure to take some withhold on the amount upfront. But it doesn’t mean, and this is the biggest takeaway, anybody who’s watching this video that just because a foreign person is subject to the withholding doesn’t mean that the IRS gets to keep the withholding. This 15% that we see here, the IRS says take it. It’s going to be withheld from the gross sales price. And it needs to be submitted to the IRS within 20 days of the closing after it happens from a foreign seller. That’s the general for the rule and the thinking of the IRS behind it. But now, as I mentioned, just because the IRS does the withholding doesn’t mean that you get to keep it. We have to think of this upfront withholding as an estimate. Although the withholding is applied to or paid by the seller, the IRS places the burden or the responsibility upon the buyer.
That’s why if anybody out there who’s watching this video and if you’re the buyer, you also have an important role to play after the transaction because although the seller is the one who’s subject to withholding, is going to be highly motivated to take the necessary steps to get a refund of these funds, the buyer also wants to make sure that the withholding is done and properly sent to the IRS within the time frame that the IRS has established, which is the 20 days. Now, as I mentioned, why did the USA have to implement FIRPTA? I covered this a second ago, but just to make sure that we understood the point, the US government doesn’t want to be put in a position where a foreigner doesn’t have any withholding and doesn’t pay any taxes on capital gains. They’re going to say, We’re going to take it upfront. But here’s what you can do to get a refund of the funds withheld at close. Now, it’s important to know or understand that the FIRPTA upfront withholding, the 15% that we talked about, is not the final tax. It’s an estimated withholding. Now, I’ve had situations where a foreigner sold and had a sizable profit.
It rarely happens, but the 15% could be less than the actual tax due based on a seller’s capital gain. In most cases, the 15% is more than enough, you’re right, withholding. A lot of times, a foreign seller, if we follow the proper steps, can get a full refund or a partial refund of that 15%. But the point is that the 15% is an estimate. If we follow the proper steps, we are very likely to get a refund of the full amount or a large portion of it. Let me cover here the FIRPTA exceptions. These are ways that we can avoid FIRPTA withholding from the point of view of the seller. I know that a lot of our friends here could be realtors who are listening to this information on behalf of their clients who are sellers. Let’s be aware of this, also for foreigners themselves. Let’s say in cases, the IRS has a specific exception to FIRPTA that says that in cases where the sales price is under 300,000 and we put it there in bold and red because it’s $300,000 and the buyer signs an affidavit at or before the closing indicated that he or she intends to use the property for personal purposes for at least 50% of the time during the first two years after closing.
Very specific in Layman’s terms, When we have a foreign seller if the sales price is under 300,000 and the buyer intends to use the property for personal use and they sign an affidavit saying that’s the case and that’s a very important and key part, then FIRPTA doesn’t apply at all. So from the point of view of a seller, this would be a perfect situation. Now, from the point of view of a buyer, if you’re a buyer out there considering or looking for information where you are being told that the sellers are a foreigner and FIRPTA applies, do you want to sign an affidavit like this? Even if you’re going to be living in the house, well, you have to be careful. From the point of view of the buyer, you have to be aware of what is that you’re signing, and the responsibility that you’re taking on. Because what happens if you were to sell the house before the two years? In theory, the IRS could hold you responsible for that withholding that wasn’t done when you bought the house because the affidavits were signed. From the point of view of the seller, if you find a buyer who is going to live in the house and is willing to sign this affidavit, excellent.
In a basic case scenario, you don’t have to worry about any upfront threat of withholding. From the point of view of the buyer, you want to be careful when signing such an affidavit. Excellent. All right. Now, more on the inception topics. This is not so much an exception, but cases where the standard is a 15% withholding of the gross sales price. However, there are cases where the upfront withholding can be automatically reduced from 15% to 10%. So FIRPTA still applies, but we can reduce it by a large amount. What cases are those? Well, the FIRPTA withholding is reduced to 10%. Number one, when the sales price is over 300,000, up to a million. From 300,000 to a million, the FIRPTA withholding is reduced to 10% as long as the same situation. The buyer is going to live in the house pretty much and signs an affidavit stating as such. In situations like that, the FIRPTA to withholding is reduced automatically to 10%. Excellent. Now, okay, so let’s cover FIRPTA cases when FIRPTA does not apply at all. We’re here, we’re going to get into certain topics, or we’re going to mention different types of companies, so this could generate more questions.
But if that comes up, please feel free to reach out to us and we can help clarify any additional questions. But cases when FIRPTA does not apply at all? Well, when the property owner is an LLC of two or more members, the LLC fills out the partnership return form 1065. What does that mean? It’s very common for a foreign person who comes and invests in the US to maybe open up and do the investment under a US entity like an LLC. This can be a good strategy for tax planning to avoid FIRPTA withholding in the future when a sale occurs. If a foreign person opens up an LLC and it’s a multi-member LLC and the LLC is the owner of the property being sold, then even if the members of the LLC are foreigners, FIRPTA does not apply at all because a multi-member LLC files as a partnership. By rule, FIRPTA doesn’t apply. That’s number one. Number two, if the property owner, the seller is a US corporation, a domestic corporation, is the owner of the property. FIRPTA does not apply because a corporation files Form 1120 and FIRPTA withholding does not apply to this form.
The first one was a multi-member LLC, owner of the property being sold. The second one is a corporation, a domestic corporation, selling the property. Even if the shareholders of the corporation are foreigners, that does not apply. Then number three is a combo, an LLC. One owner, multi-owner, whatever the case may be, but either a single member or a multi-member LLC that has elected, that has made the election to be treated as a corporation for taxes because it files the same Form 1120, FIRPTA does not apply. I know we mentioned several things there that might not be that you might not be familiar with as far as these forms, 1065, we can give you a call for more information. But these are just general tax strategies where FIRPTA does not apply that a foreigner can take advantage of. Alright. Oh, one more case when FIRPTA does not apply. This part of it, number four, has nothing to do with companies, right? Let’s say the seller or the property being sold is owned by an individual. But that individual is a foreigner as far as immigration status, believing in the US, I’ve seen it happen plenty of times before.
Well, so when the foreign seller meets the requirements to be considered a resident alien for tax purposes, remember, there’s a difference between what the immigration status of an individual is and what the status is as far as the IRS is. For tax purposes, an individual who might not have their green card yet or residency is not a citizen, can still avoid FIRPTA withholding because they can be considered for tax purposes, a US person, if they either have a green card or they meet the physical presence test. That’s the point that I’m trying to get to, B. When a foreign person has a physical presence in the US, maybe they’re here in the asylum and waiting to get their residency or their green card, then they can avoid FIRPTA or FIRPTA does not apply simply because of their physical presence in the US, their substantial presence. There’s a test. It can be quite convoluted or complicated, and we can get into that with you. But know that if a foreigner has been physically present in the US for the last several years and you meet the substantial presence test, then FIRPTA can be completely avoided or does not apply.
Excellent. Now, quickly here, let’s talk about cases when FIRPTA does apply. Number one, owners of the property are foreigners as natural persons, no LLC, no corp. This is the classic case. You have a foreign person who is selling US real estate, be it one owner, or multiple owners. FIRPTA applies to the gross sales price. Number two, I mentioned LLC before, but I mentioned before that either we had multi-member LLCs or we had single-member LLCs who had made an election to be treated as a corporation for tax purposes, FIRPTA didn’t apply. But in number two, we have a single-member LLC. That single member LC, the single member is a foreigner, FIRPTA applies. Why? You might say, Well, it’s under an LLC. Well, we have to understand that a single-member LC, the IRS sees as for tax purposes, they call it a disregarded entity. That means that even though for legal purposes, it’s an LLC, when it’s a single member, the IRS says, You’re going to file on the taxes as under that single member’s requirement and a foreigner, FIRPTA applies. That’s why even if it’s under an LC, single member, FIRPTA applies. They want to change it to a multi-member LLC for FIRPTA not to apply.
Number three is if the seller of the US real estate is a foreign company, be that a corporation, whatever type of entity it may be, if it’s a foreign company who owns US real estate, FIRPTA applies. Excellent. Now, that we know that FIRPTA applies, is there any way that we can reduce the withholding? Yes, there is. The IRS allows a foreign seller who knows they’re going to be subject to FIRPTA to file for what’s called a Reduced Withholding application, a Reduced Withholding certificate, form 82-88B. This is a specific form that can be filled out for the closing, excuse me, for the closing, add closing, know that it’s on the closing date, and submit it to the IRS. What the IRS will do is they’ll take into account what the purchase price was, and what the selling price was, and determine if there’s a capital gain. If there’s no capital gain, the IRS will reduce the withholding to zero. If there is some capital gain, then what the IRS will do, they will reduce the withholding to 20% of the capital gain. Instead of 15% of the growth sales price, it’ll be 20% of the gain, which generally is going to be a much lower number.
This is completely a good way to go. It’s a good possibility. I have personally prepared a lot of these 80-28 for foreign clients in the past. It’s an option. Unfortunately, right now I would say it’s not the best option. Even why do I say that? Because of point number two. Currently, we’ve seen that the waiting time to hear back from the IRS FIRPTA unit on a reduced withholding application is 9-12 months. It just doesn’t make sense time-wise to wait to go this route. Right now, the better option—and this is subject to change—is pretty much COVID, the pandemic caused great delays within the FIRPTA unit as far as processing these applications. Pre-pandemic, the waiting time for applying for the reduced withholding certificate was usually 2-3 months. Made a lot more sense. It was a completely viable option. But from what we’ve seen, they are still way behind processing these applications. So even though this does exist and we hope to come back to it and use it more as a tool to get that FIRPTA withholding reduced, right now it doesn’t make a lot of sense, but hopefully, it will soon. All right, excellent. This is just for you to see what Form 88, 82, and 88B as I mentioned, look like.
This is the application. You can see in box one, that’s where the seller transfer information goes. Box two is where the buyer’s information goes. The rest of it is just details of the property address. You can see in the 6A, that’s the selling date, 6/b, the selling price, and so on. This is the actual form that is used to apply for the reduced withholding certificate, which we hope to be able to use again soon. Excellent. Form 82, 88A is the form that we used on this previous slide, on box number three. I mentioned this when you applied for Form 82, 88B, the title company holds on to the FIRPTA funds in Escrow. But when it comes time to send the funds to the IRS, Form 82, 88A is what we use to send the funds along with the 15% check that goes to the IRS. Now, we’ve come to the frequently asked questions. The questions that we discuss are the most common misconceptions, there’s a lot of FIRPTA information out there. That’s why we’re doing this video to try to help our public and our clients to just be clear on how this FIRPTA process works, how we can help, and to answer some of those questions that the information might not be right out there.
Question number one is, if a foreign seller has made a loss on the sale of property, do you have to pay FIRPTA? A lot of it’s been our experience that a lot of foreign sellers are told either by realtors, by friends, who knows? But they are misinformation and told that because they’re selling at a loss, FIRPTA does not apply. That is not the case at all. Remember that in the US, we are a huge nation. There are thousands of real estate transactions, and the IRS cannot be involved in every one of them. That’s why the FIRPDA rule is a general rule that applies to all transactions. The IRS says we’re going to require the withholding upfront, regardless if there’s a loss. The IRS doesn’t know when a foreigner, when they’re selling if they have a profit or a gain. The IRS says we’re going to require the withholding, regardless if the seller has a loss. In a situation where the seller is selling for a loss, we can know that we’re going to get a full refund of the withholding because if there is no capital gain, there’s no profit, and there’s not going to be any tax to pay.
Under FIRPTA, there is no automatic exception from FIRPTA if a seller is at a loss. If a foreigner feels that he is exempt from FIRPTA, he may need to request an IRS withholding certificate. This is what I mentioned earlier, from 80 to 88B. This is the one route to go, and this is going to be the way to go, especially when the winning times from 80 to 88 come down. Question number two. The foreign seller does not have an ITIN, we haven’t talked about ITINs and is willing to pay the IRS. Can you send the money to the IRS without an ITIN? No, you don’t want to do that. Because if the IRS receives FIRPTA funds without an ITIN number for the seller, they’re not going to know who to apply it to. It could get lost. They’re going to have a name, they’re going to have a property address, but they’re not going to have a tax identification number for the seller. Foreign sellers must have or apply for an ITIN number if they don’t already have one as part of this process. That’s a service that we can provide as well.
We can help foreign sellers apply for their ITIN number. It stands for Individual Taxpayer Identification Number. This is the tax ID number that a foreign person needs to use whenever they’re going to file a tax return. To get to that point of filing a return, which is how we get the FIRPTA that we’re holding back, we must take advantage of the FIRPTA, and the process, and apply for the ITIN ahead of time. If you’re listening to me out there and you’re a foreign seller and you don’t have an ITIN, we can help you apply for it. If you have an ITIN and it might be expired, we can help you renew it as part of this process. All right? An ITIN is a very important part. Let’s go to number three. Does FIRPTA apply when both the seller and the buyer are foreigners? Yes. It doesn’t matter what the status of the buyer is. If the seller is a foreigner, the same rule applies, even if both parties are foreigners. If the buyer and seller are both foreigners. If the seller is a foreigner, FIRPTA is going to be used, and it would be essential for both parties to have an ITIN number.
Even if the buyer is a foreigner and doesn’t have an ITIN, we can help that foreign buyer apply for the ITIN as well. Number four is the 10-31 exchange. Probably a lot of people have heard this out there. Does doing a 10-31 exchange cancel FIRPTA? No. Doing a 1031 Exchange does not cancel FIRPTA withholding for the foreign seller. What’s a 1031 Exchange? 1031 Exchange is a tool, a tax planning tool that an individual who is going to sell real estate and knows that they’re going to have a sizable capital gain or profit can enter into a 1031 exchange process to delay, the recognition of profit and paid capital gains taxes on the current year. If I know I’m going to sell a piece of real estate, I know I’m going to have a profit, I can go in and follow the 1031 exchange, paperwork, file it, do what I need to do, follow all the rules. When I file my taxes, I’m going to sell that property. I’m going to exchange it or close on a new one. The funds from the sale of the first one are going to be transferred directly into the purchase of the next one.
I do all my due diligence. Everything is squared away. When I file my tax return for that year, I say, Hey, IRS, this was a 1031 exchange, so this profit that I had, I’m not going to recognize it for the current year, not paying capital gains. I’m going to roll it forward to the future year. A foreign person can do all of that. The same process can take advantage of the same of the same 1031 exchange. But the difference is that a foreign person doing the 1031 exchange does not avoid FIRPTA withholding because they are foreigners. The reason that I bring this slide or include this question is that in talking to foreign clients, foreign sellers, and realtors, it’s a very common misconception that just because you do a 1031, it avoids FIRPTA, and it does not. It’s super clear on that. There you go. Here’s our contact information. If you are listening to this video today, and you have any further questions about FIRPTA, please give us a call. Send us an email. We would be happy to provide you with a consultation. We’ve been doing FIRPTA now for over 10 years. Clients all over the world, thankfully.
Being in Florida, there’s a lot of foreign investment, so we get to have a lot of practice at it and have a lot of experience. We’ve been very successful in helping our clients deal with FIRPTA, comply with the IRS, and get back as much of that withholding as possible. Well, thank you very much for your time today. Again, this has been Robert Acevedo with FreedomTax, and we’ll see you next time.
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