The Foreign Investment Property Tax Act (FIRPTA) Explained


What is FIRPTA? FIRPTA is the Foreign Investment in Real Estate Act. The purpose of FIRPTA is to ensure that foreign persons who own real estate in the United States file the necessary tax documents regarding the sale or transfer of the property in the United States. While foreign persons selling certain U.S. assets are not subject to the capital gain on the sale (subject to the 183-day rule), the same rules do not apply to the sale or transfer of real estate. Americans. Therefore, when a foreign person sells or transfers real estate in the United States, there are additional IRS processes and procedures that parties must follow to ensure tax compliance.

With proper planning (and obtaining the necessary Form 8288-B), the tax impact can be minimized.

Here are five basic FIRPTA tips:

Plan ahead for FIRPTA

When it comes to real estate transactions, at least in California, the buyer has all the cards in hand.

At almost any stage of the buying process (before contingencies are released), the buyer can opt out of the transaction.

And, when FIRPTA is involved, it can delay the sale due to the time it takes to get a withholding certificate.

This is why it is important that the seller endeavors to obtain all the necessary certificates (see below) as soon as possible to avoid a long and prolonged receivership – and risk that the buyer withdraws due to changes. under market conditions, or simply overall nuisance of the FIRPTA process.

What is a FIRPTA Withholding Certificate?

The FIRPTA Withholding Certificate is used to minimize the amount of the sale price withheld.

Here is an example of why this is necessary: ​​Michelle is a foreign national who owns a US property that she purchased for $800,000. She uses it as a rental property. Michelle sees the market decline and wants to withdraw the money so she has cash to make other investments. She enters into a residential purchase agreement to sell the property for $840,000.

The capital gain on this type of sale is probably nil, once the expenses are taken into account in the sale price.

But unless Michelle can get a withholding certificate, the U.S. government will demand that 15% of the selling price is retained.

Profit vs sale price

It is important to note the difference that the 15% that the US government withholds is based on the selling price and not the Gain.

Form 8288-B Withholding Certificate

To avoid a 15% withholding, the transfer may request a withholding certificate using IRS Form 8288-B.

If the form is accepted by the IRS, the standard 15% withholding does not apply and the withholding based on the transfer or sale of the property will be reduced or eliminated.

Be sure to file in a timely manner

This is where it gets a little tricky.

Indeed, it can take up to 90 days for the IRS (even before COVID) to process the 8288-B request.

If the certificate is issued before the transfer of ownership, no withholding may be required.

If the certificate is issued after the holdback can speed up the refund time, and if you are used to dealing with the IRS, it would be in your best interest to make the request before the transfer.

We specialize in Offshore IRS Disclosure and Compliance

Our firm specializes exclusively in international taxation, and more specifically IRS Offshore Disclosure.

Comments are closed.