The Foreign
Investment in Real Property Tax Act ("FIRPTA") was enacted to curtail lost capital gain tax revenue from the sale of real property by foreign individuals and entities. It can be a speed-bump for some when buying or a home if it's not known upfront.
What does this mean for foreign sellers?
The sale of US real property by a foreign owner is subject to tax on the capital gain. Capital gain is profit made on the overall sale of a property. To ensure this tax is paid by a foreign owner who may have severed his only connection to the US by way of this sale, FIRPTA requires a withholding tax that is applied at the time of the sale. This tax withholds 10% of the gross sales price. This means that 10% is withheld even if the property is sold had a loss. In order for a foreign seller to recover any portion of the 10% that exceeds the actual amount owed under the capital gains tax, the seller must wait until the end of the year and file for a refund. Some states also require a similar withholding tax but at a lower rate.
There are some exemptions so speak with your tax expert. In addition, a foreign property owner my form a US corporation to hold the real property. Since the entity holding title is now a US corporation, FIRPTA does not apply. There are some important things to know about this option, so again it is best to speak with a tax expert.
How does FIRPTA affect buyers?
Since a foreign property owner may have no other ties to the US, American buyers must withhold 10 percent from the purchase price of foreign-owned properties to remit to the IRS. Buyers are required to send the 10% along with Form 8288 to the IRS within 20 days of purchasing the property. If not, the buyer may be held liable for a US tax that foreign sellers must pay. FIRPTA puts the responsibility on the buyer to determine if the seller is a tax resident of the US or a foreign country. All buyers purchasing a home from a foreign seller should consult with the IRS, an accountant or a tax attorney before completing the sale to be sure the transaction is handled properly.
There are certain exemptions and requirements so it is very important to speak with a tax expert. Such exemptions include if the sales price is less than $300,000 and the buyer will occupy the property as their primary residence. Your Realtor is not permitted to provide tax and legal advice regarding FIRPTA so make sure to reach out to the right professional.
Follow this link to obtain full information and details about FIRPTA from the IRS: http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding
