When is the FIRPTA affidavit required? This question often comes to an individual’s mind when they deal with real estate property. Those individuals who are new to investing in real estate property likely ask when is FIRPTA affidavit required. But before we take the plunge to explain when is FIRPTA affidavit is required, you should understand the basics of FIRPTA. Basically, FIRPTA is all about taxes. Previously the Internal Revenue Service (IRS) never collected taxes on real estate properties, no matter who the seller was or if the seller was a local or a foreigner, but in the year 1980 the FIRPTA law was enacted.
If you need help with an IRS FIRPTA Withholding Certificate please call us at 407-502-2400, or email us at [email protected].
This law is specially made for foreign sellers selling US real estate property. This is why buyers who want to buy the real estate property may question when is FIRPTA affidavit required, and are also cautious about dealing with foreign sellers. Ever since the law has been made, the IRS charges taxes on foreign individuals. These taxes are necessary to be withheld by the Internal Revenue Service. But some foreign sellers want to cut down those taxes.
In order to fully under the basics of FIRPTA, tax withholding, and learning the core of when FIRPTA affidavit is required, follow the information written in this blog.
The Basics of FIRPTA Affidavit
Before we explain when is FIRPTA affidavit required, you should first understand the basics of FIRPTA in order to properly understand FIRPTA. The abbreviation, FIRPTA, stands for Foreign Investment in Real Property Tax Act. The main idea of the FIRPTA affidavit is to collect taxes from the sale of real estate property that is due upon the foreign seller. These taxes are really very necessary to be given to the IRS because the foreign individuals are selling the local property of the United States. This is why it becomes their right to pay the taxes selling the US real estate property. However, there are certain exceptions that omit foreigners to pay off the taxes, which we will be explaining further.
While there are several laws in the United States, the FIRPTA law for the real estate property charges tax from the foreigners. As per the FIRPTA law, the US buyer will withhold 15% of sales proceeds from the US real estate property. The law was established in the 1980s. As mentioned earlier, the IRS had no way to charge taxes on the sale price from the foreign sellers, now the IRS charges 15% amount of the taxes.
Previously, the amount of withholding taxes was 10% but as per the new amendments that happened last year in the month of February, the tax withholding percentage has been increased by 5%, making it 15%. So, all those who are questioning when is FIRPTA affidavit required, should also keep in mind that the foreign sellers they are dealing with should now pay 15% taxes to the IRS. Those who want to avoid it or fall under the exceptions can simply fill the FIRPTA affidavit for that. So, all those who are asking when is FIRPTA affidavit required, should keep in mind if their seller is not a foreigner, they need not pay the taxes to the IRS under the FIRPTA.
If your foreign seller falls under the exceptions, they may be worried about when is FIRPTA affidavit required more than others, because this form is for the resident sellers. The FIRPTA affidavit is required when you are dealing with the local sellers of the United States. The FIRPTA affidavit is for all those local sellers who are not foreigners. This form certifies that the seller of the real estate property is a local seller, and a non-resident alien to provide income tax to the Internal Revenue Service.
This form can help your seller in avoiding the FIRPTA withholding. But for this, you need to be sure that your seller is not a foreigner or you fall under the exceptions. Additionally, the FIRPTA form should be given to the IRS as soon as possible. This is because the form will be processed under twenty days by the IRS representative and you will have the real estate property in your hands very soon. There is no doubt the payment of these taxes can be costly for sellers, this is why the FIRPTA affidavit is made to help the local sellers determining the non-residential status.
FIRPTA Affidavit Features
Now that you know when is FIRPTA affidavit required, you should also understand some important features and rules of the elements of the FIRPTA affidavit below.
· 15% of Taxes Due on Foreign Sellers
When the FIRPTA law was enacted at first, 10% of taxes were due on the foreign sellers. But after the revision and amendments of FIRPTA law, the taxes have been revised and have been raised with 5% on the real estate properties, which now makes it 15%.
So, all those who are pondering over when is FIRPTA affidavit required, should keep in mind that now the foreign sellers will have to pay 15% of the sale price on the real estate property. Additionally, there are some states that require some other requirements. Therefore, if you want to know about your estate in specific, you should contact your local lawyer in this case.
· Local Seller
If you are looking for a real estate property or want to invest in it for the future, you should opt for a property seller who either has United States Citizenship or has a green card. When you deal with the residential seller of the United States property, you need not have to worry about running for the FIRPTA affidavit determining the residence. If you are dealing with a residential seller, you need not worry about when is FIRPTA affidavit required as there will be no FIRPTA withholding.
· Exception From FIRPTA Withholding
If you are interested in a property sold by a foreign seller yet also want to save money from paying taxes. You need to see the price or amount of the real estate property for that. The amount of real estate property varies. If the property that you own is less than $300,000, you will not be liable to pay 15% taxes on the real estate property. According to the IRS, the real estate property that holds less than this amount is likely considered as a primary residence. This saves your foreign seller from paying taxes to the IRS.
· Avoiding FIRPTA Withholding
When buyers are interested in the real estate property sold by the foreign sellers, it may become really costly for the foreign sellers to pay off the taxes to the IRS. This can make them look for ways to cut down or omit the taxes entirely. 15% amount of taxes can be transmitted by filling the FIRPTA affidavit. This is why individuals ponder over when is FIRPTA affidavit required.
But before filling the FIRPTA affidavit, you should keep in mind that first, they have to get approval from the Internal Revenue Service to avoid FIRPTA withholding. Then take the necessary steps to deal with the taxes. Those who are asking when is FIRPTA affidavit required, should have to follow the following ways listed below to avoid the withholding.
- You can cut down the withholding tax from the tax-free sale using 1031 Exchange.
- You can also get rid of the taxes using Form 8288 or a withholding certificate.
- You can omit the amount of taxes when you have a sale of inherited real estate property.
- Sale at a small profit or loss can also help in cutting down the taxes.
When is FIRPTA Affidavit Required? – Understanding These Terms Will Help You in Filling FIRPTA Affidavit Properly
If you are asking when is FIRPTA affidavit required, there are certain terms that you should understand first. The terminology used in the FIRPTA affidavit form has some different meanings than in general. The terms that are used in the form and can help you in understanding FIRPTA properly are elaborated below.
The transferor is the one who is liable to pay off the taxes for the real estate property. They are likely the foreign people who are required to dispose of the real estate property interest by gift, sale, exchange, or any other transfer. If you find a transferor of the disregarded entity, they will be treated as the transferor of the real estate property and not the entity.
The Transferee is the person that acquires the real estate property interest. This person is likely the buyer f the real estate property who is supposed to see whether or not the transferor is a foreign person and has to check if they pay the taxes or not.
· Amount Realized
This is the amount that is charged for the real estate property interest. The amount that is realized by the seller is usually the sum of the following.
- The fair market value of other property that is to be transferred or that has been transferred.
- The cash that is to be paid or the principal amount that has to be paid.
- The amount of liability that is assumed by the transferee.
· Foreign Person
A foreign person is an individual who is a non-resident alien. They are the ones who are charged taxes over the real estate property. Also, the foreign corporation that has not made an election under the Section 897 will be also be treated as foreign corporation. The election under Section 897 legally makes the foreign corporation, domestic.
Therefore, if you find a real estate property that has not made an election under this section, would mean that they are still considered as a foreign person or corporation. Such real estate properties are for all including foreign partnerships, foreign estate, foreign trust etc.
The disposition of a United States real estate property interest by the transferor who is likely a foreign person has to provide income tax withholding to the Internal Revenue Service. The transferee is going to be the withholding agent who is likely the buyer. The transferee is the one who is responsible to find out if the transferor is the foreign person or not. The transferor’s green card and SSN number will help you in determining whether or not they are transferors.
If the buyer is the foreign person and unfortunately you fail to withhold, the transferee will be held liable to pay the taxes. In some cases, transferors try to fool and fraud with the transferees showing them incorrect SSN numbers and false green cards. Buyers need to be alert and get them check by their lawyer otherwise they may end up paying huge amount of money and bearing the losses in the long haul.
Basically, there are two types of corporations, namely, foreign corporations and domestic corporations. A foreign corporation is the one that distributes a United States real estate property interest and this type of corporation is required to withhold 35% of the gain on taxes. But this withholding requirement will not be applicable if the foreign corporation elects under Section 897, making their corporation treated as Domestic Corporation.
Another type of corporation that distributes the United States property interest and is only withholds 15% of the fair market value price is called as Domestic Corporation. Before you considering filling the FIRPTA affidavit form, you should first know which corporation you are filing for. Ensure to mention the type of corporation in the form.
Exemptions of FIRPTA Affidavit
There are certain factors and elements that can keep you away from the FIRPTA withholding. These are considered as exemptions and limitations. Now that you know when is FIRPTA affidavit required, you should also know about the exemptions that can save foreign sellers from paying a hefty amount of taxes.
· Amount Not More Than $300,000
All those real estate properties which are either $300,000 or less than $300,000, will be considered as primary residential property. These kinds of properties do not legally require you to pay off the taxes on the sale price. Therefore, all those who are asking when is FIRPTA affidavit required, should remember that this limitation may not require foreign sellers to pay the taxes. This condition is only applicable to the individual transferee.
· Domestic Corporation
The first thing that can save foreign sellers from paying a huge amount of taxes is the domestic corporation. Domestic real estate property is likely used for the purpose of business and trade. When you come across a domestic real estate property like this, foreign sellers are not liable to pay 15% taxes on the sale proceeds.
But there are some limitations to certain dispositions for which you need to consult your local lawyer. So, whenever you come across a domestic corporation and are unsure about the taxes, you can consider discussing it with your attorney.
· Qualified Statement
When you deal with a credible foreign seller, they likely make arrangements beforehand for avoiding paying off the taxes. The foreign sellers likely give the certification with a qualified statement to the Internal Revenue Service (IRS) determining that the property does not withhold any taxes. When the foreign seller presents this kind of statement or the document to you signed by the IRS, then they are not liable to pay taxes and are simply exempted from paying them.
Sometimes the Internal Revenue Service (IRS), themselves send the withholding certificate excusing the foreign seller not to pay the 15% taxes on the sale price of the real estate property. This happens very rarely in exceptional situations. If your foreign seller presents you an excuse from the IRS which is stamped and signed by the IRS, they need not pay the taxes. You just need to make sure all the documents are legitimate and authentic.
The acronym USPHC stands for United States Property Holding Corporation. The real estate property that does not fall under the USPHC from the five years or less time period is considered to be exempted from it.
· Zero Amount
When the transferor gets to know that the real estate property interest is zero, they will not have to pay the taxes to the IRS.
· US State Possession
When foreign sellers are selling the real estate property purchased by the United States, they need not pay the taxes for it. But if the real estate property falls under the District of Columbia or political subdivision, then it is a different case and the foreign seller has to pay the taxes.
Buyers should be alert and watchful in purchasing real estate property from a seller. Now that you when is FIRPTA affidavit required, we hope you find this blog helpful. Come back again to find more interesting information. Good luck!
If you need help with an IRS FIRPTA Withholding Certificate please call us at 407-502-2400, or email us at [email protected].