FIRPTA Explained

FIRPTA Explained

FIRPTA Explained

What is FIRPTA?

FIRPTA is a federal tax law that ensures that foreign sellers pay income tax on the sale of real property in the United States. The law aligns foreign sellers with U.S. residents who are required to report the sale of real property and potentially pay income tax on the gain realized from the sale when filing their annual income tax returns.

What transactions are subject to the FIRPTA tax?

Generally, the FIRPTA tax is due on the sale of an interest in real property from a foreign seller. Examples of an interest in real property include fee ownership, leaseholds, co-ownership (where one or more of the sellers, but not all sellers, are foreign), and fractional interests or timeshares.

Who has the liability to pay the FIRPTA tax?

FIRPTA imposes the liability on the buyer to collect and pay the FIRPTA tax. The buyer is regarded as the “withholding agent” for the collection of the FIRPTA tax and is required to withhold a percentage of the sales price (and not the net proceeds) paid to the seller. In practice, the funds are collected from the seller’s proceeds at closing and remitted by the closing company on behalf of the parties.

Are there any exemptions to the FIRPTA tax?

There are a number of exceptions to the FIRPTA tax, based on the status of the seller as a U.S. resident, and the purchase price coupled with the use of a residence on the real property.

  • The withholding tax is not required if the seller provides a certification to the buyer that the seller is not a foreign person or entity
  • No withholding tax, or the reduced rate of 10% will be required if (1) the buyer is an individual, (2) the purchase price falls within certain limits. This exemption does not apply to vacant land.

To qualify as a residence, the buyer must have definite plans to reside at the property for at least 50 percent of the number of days that the property is used by any person during each of the first two 12 month periods following the date of the transfer. The number of days that the property will be vacant is not taken into account in determining the number of days that the property is used by any person. A buyer will be considered to reside at the property on any day on which a member of the buyer’s family resides at the property. The residence exemption only applies if the buyer is an individual, and not if the property is acquired by an entity for or on behalf of an individual who will use the property as a residence.

What are the FIRPTA tax rates?

The FIRPTA tax rate is 15% of the sales price, unless one of the exemptions can be applied. If the buyer is an individual, and is willing to attest that the buyer will be using the property as a residence for a period of time each year, then, for a purchase price less than $300,000, no tax is due. For a purchase price between $300,000 and $1,000,000, and with a similar attestation, the FIRPTA tax rate is 10%. The FIRPTA tax is a deposit on the tax due and may be refunded in part or in full to the seller after the IRS has reviewed and approved the seller’s income tax return.

When is FIRPTA tax payable?

The closing company, on behalf of the buyer, will report and pay over the tax by the 20th day after the date of the closing. Late submission may result in penalties and interest on the tax payable.

FIRPTA in Section 15.8.1 of the 2019 Contract Forms

The seller must indicate if they are a foreign person for purposes of the FIRPTA tax. This will ensure that the appropriate questions and investigations are made and the required forms signed to avoid any surprises at the closing table.