With nearly a quarter of all internationally owned U.S. real estate purchases in the Sunshine State, chances are, as a Florida Realtor® you will have a foreign seller involved in a transaction sooner or later. You should have an understanding of the Foreign Investment in Real Property Tax Act of 1980, commonly referred to as FIRPTA, whether you represent the seller or the buyer.
Designed to prevent foreign sellers from taking their profit out of the country and outside of IRS jurisdiction without paying tax on the gain, FIRPTA works by requiring the buyer or title company to withhold 10% of the sales price from the seller’s proceeds and remit to the IRS within 20 days of closing or face penalties.
Sounds easy, right? Not really. 10% of the sales price must be withheld and remitted even if the seller lost money on the property – it is their responsibility to prove they qualify for a refund afterwards. Another complication is when a foreign seller owes more than the sale will net, as in the case of a short sale. In that case, they will need to bring 100% of the withholding to closing, something many can’t afford.
There are two exemptions to the requirement for withholding. For residential sales under $300,000.00, the buyer may sign an affidavit stating:
- The purchase price is $300,000 or less;
- The property will be their personal residence, the buyer or buyer’s family member will occupy the property at least 50% of the number of days the property is in use during each of the first two 12 month periods following the date of purchase;
- The buyer is a U.S. citizen. Please note that even if the exemption is met, the seller is still liable for the payment of any tax due on the sale. The buyer may sign or refuse to sign this affidavit at their own discretion.
A second exemption is if the foreign seller secures a withholding certificate from the IRS prior to closing. The application will show the basis for the seller in the property from the original purchase, any increases in the basis for capital improvements, and the amount being realized from the sale after subtracting costs of sale. This formula is used to show if the seller, as transferor, has any taxable gain.
If the application (with supporting documents including deeds, contracts, HUD-1 closing statements and receipts) is accepted by the Internal Revenue Service, the transferor can obtain a withholding certificate showing the amount of tax due (often zero) and if obtained before closing, no withholding is required. If filed before closing, but obtained after closing, the ten percent withholding can stay in escrow with the closing agent and then be released in whole or in part upon presentation of the withholding certificate to the closing agent.
- FIRPTA withholding does not apply to anyone who is a US Citizen or a resident alien as they will have a Social Security Number.
- FIRPTA withholding is not a tax, it is a withholding.
- Foreign seller must have a tax ID number (ITIN)
- 10% withholding is never taken from the buyer’s funds, it is a seller charge only.
- We always suggest that a foreign seller seek the advice of an accountant prior to closing.
- International taxpayers should visit the IRS website, Here.
This article was written by Lizabeth Cassella, Owner of Alliance Title