What Are The FIRPTA Tax Withholding Requirements?

Many foreign national real estate investors ask us, “What are the FIRPTA Requirements?”. Our IRS Enrolled Agent and FIRPTA specialist will answer this question in this video. It is very important that when a foreigner is selling real estate in the United States, they are aware of the FIRPTA requirements so they are not taken by surprise by the FIRPTA Withholding when they close on their real estate sale transaction.

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DISCLAIMER

This video is intended for education 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 it 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.

TRANSCRIPTION:

Hello everyone, this is Robert Acevedo, the FERPTA specialist here at Freedom Tax. Today, we’re going to be talking about FERPTA, which some people might find quite complicated. But if you stick with me, I’m going to make this FERPTA topic super simple to understand. So, what does FERPTA stand for? FERPTA is the Foreign Investment Real Property Tax Act. If you have ever wondered how foreigners get taxed in the U.S., that’s what I’m here to show you today.

The FERPTA law was passed in 1980, and its purpose was for the U.S. government to ensure that foreigners paid taxes on profits from selling U.S. investments or real estate. Before FERPTA, a foreigner could sell U.S. investments or interests and not have to pay any tax, and the U.S. government, specifically the IRS, was missing out on all of that tax revenue.

Once FERPTA was put into place, all of this changed. Now, why does FERPTA matter to you? Well, from the seller’s perspective, if you are a foreign seller of U.S. real estate, you are going to be subject to FERPTA withholding. From the buyer’s perspective, you want to make sure that if you are buying from a foreigner, FERPTA applies, and you want to ensure that you follow IRS procedures to avoid any possible penalties.

Now, why does FERPTA apply to you? From a seller’s perspective, you could be the one who is subject to FERPTA withholding and want to make sure that you take the proper action to possibly recuperate those funds. From the buyer’s perspective, the IRS holds the buyer responsible for the FERPTA withholding, and you want to make sure that you eliminate any possibilities of penalties for non-compliance. FERPTA can also greatly affect how real estate transactions are structured or flow.

Now, who does FERPTA apply to? Bottom line: foreign persons or entities, whether they are corporations, individuals, or partnerships. If they are foreigners, FERPTA could possibly apply. Now, when do we actually see FERPTA in a real estate transaction? What the IRS requires is that the buyer withhold generally 15% of the gross sales price from the seller at closing. These funds need to be submitted to the IRS within 20 days of the closing. It is the buyer’s responsibility to ensure that these funds ultimately get into the hands of the IRS. In other words, FERPTA is a prepayment of the seller’s potential tax liability.

The buyer wants to make sure that these funds are withheld and sent to the IRS to avoid any personal responsibility for not withholding FERPTA and sending it to the IRS after closing. Now, you might wonder what types of properties are affected by FERPTA. Well, FERPTA applies to almost all types of properties within the United States: residential homes, commercial properties, and even vacant land.

There are some exceptions to the FERPTA withholding. One of the most common ones is the $300,000 exception. This means that if the sales price is under $300,000 and the buyer intends to live in the house, then FERPTA could be avoided if the buyer signs an affidavit at closing. There are also exceptions if the seller is a non-resident but has possibly resided in the U.S. for a certain amount of time; FERPTA could also be avoided in this way.
Now, how do you, as a seller or the buyer, deal with FERPTA if it is involved in your transaction? Working with a professional who has experience with FERPTA transactions is going to go a long way. We frequently work with realtors, title companies, attorneys, and buyers and sellers who hire us to help them throughout the transaction to ensure compliance with the IRS.

Working with a professional is essential to making sure that the IRS receives the proper forms and the correct amounts of FERPTA withheld at closing. This will help avoid any possible letters or penalties from the IRS. For example, we are frequently hired to prepare the FERPTA forms 8288 and 8288A. These are the forms prepared at closing and sent to the IRS along with whatever the withholding amount was. We often prepare these forms and provide them with instructions to attorneys or closing agents, so the amount withheld at closing gets to the IRS within 20 days of the closing date, as stated in the IRS FERPTA guidelines.

Now, let’s talk about noncompliance. If FERPTA applies to a transaction and the buyer does not ensure that the withholding is done and that the forms are sent in, the IRS could come back on the buyer and enforce large amounts of taxes and penalties for noncompliance. We want to avoid this at all costs. At the same time, from the seller’s perspective, who is the one subject to the withholding, it is extremely important that the FERPTA forms are properly filled out and filed on time. This is crucial for putting the seller in a position to claim a refund of the funds withheld at closing.

In summary, FERPTA is a critical piece of a real estate transaction for a foreign seller and also for a buyer involved in this type of transaction. Seeking the assistance of a professional will help ensure compliance with IRS requirements and avoid headaches in the future. Thank you for joining us today. I hope you found this information helpful, and if you have any questions, please make sure to reach out to us. We would love to assist you with any of your FERPTA questions. See you next time.

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