FIRPTA is a federal tax law that ensures that foreign sellers pay income tax on the sale of real estate in the United States. The law aligns foreign sellers with U.S. residents, who are required to report the sale of real estate and pay any income tax income tax on the gain when they file their annual tax return.
What transactions are subject to FIRPTA tax?
Generally, FIRPTA tax is due on the sale of an interest in real property to a foreign seller. Examples of examples of interests in real property include property rights, leases, co leases, condominiums (where one or more, but not all, of the sellers are foreign), and fractional or timeshare interests.
Who is required to pay the FIRPTA tax?
FIRPTA imposes an obligation on the property buyer to collect and pay the FIRPTA tax. The purchaser is considered the “agent” for the collection of this tax and is required to withhold a percentage a percentage of the sale price (not the net proceeds) paid to the seller. In practice, the funds are recovered from the seller’s proceeds at closing and remitted by the closing company on behalf of the parties.
Are there exemptions from the FIRPTA tax?
There are a number of exceptions to the tax, based on the seller’s status as a U.S. resident, and the purchase price associated with the use of a residence on the property.
Withholding tax is not required if the seller provides the buyer with a certification that the seller is not a foreigner.
No withholding tax, or the rate will be reduced by 10% if (1) the purchaser is an individual, (2) the purchase price falls within certain limits. This exemption does not apply to vacant land.
To be considered a residence, the purchaser must intend to reside in the property for at least 50% of the number of days the property is used by any person in each of the first two 12-month periods following the date of transfer. The number of days of vacancy of the property shall not be taken into account in determining the number of days use of the property by any person. A purchaser will be considered to be residing in the property on each day that a member of his or her family resides in the property. The residency exemption applies only if the purchaser is an individual, and not if the property is acquired by an entity or on behalf of an individual who will use it as a residence.
If you need help understanding FIRPTA requirements and how they’ll affect your property purchase, don’t hesitate to contact us for assistance.