What is FIRPTA?
Not a FIRPTA expert? Start here.
The Foreign Investment in Real Property Tax (FIRPTA) sounds easy enough to understand at first glance: foreign sellers pay the IRS 15% of the gross sale price within 20 days of closing. Unfortunately, it’s anything but simple.
What’s at Stake?
If not handled properly, FIRPTA can threaten a successful closing and be a gift from the IRS that keeps on giving since the buyer is responsible for all FIRPTA compliance, from the paperwork to ensure the IRS receives the money on time. The title company usually facilitates the actual transfer, but the IRS can (and will) assess the buyer personally for any uncollected withholding, plus penalties and interest.
Determining Foreign/U.S. Person Status
Let’s start from the beginning – FIRPTA applies to foreign buyers. But who does that include? According to the IRS, anyone who is not a U.S. person (U.S. citizen or resident alien). Even if the seller does not have a green card, they may qualify as a resident alien for tax purposes if they meet the surprisingly complex substantial presence test, rendering the sale not subject to FIRPTA. It’s important to note that foreign person status for this purpose is not affected by whether or not the seller has a social security or tax identification number.
Determining the Rate
There’s good news buried in the details, though. A seller subject to FIRPTA might be eligible for a reduced withholding rate or even a full exemption under some very common circumstances. When the buyer intends to use the home as their personal residence*, the rate reduces to 10% if the sale price is less than $1 million and is fully eliminated if the sale price is $300,000 or less. Vacant land is not eligible for the full exemption or reduced rate, even if the buyer intends to build their personal residence on the land.
Shoring Up the Deal
Thankfully, there are a few ways to support a transaction with careful planning.
- Non-Foreign Affidavit: If a seller proves that they are a U.S. person with the substantial presence test, they can sign a Non-Foreign Affidavit to guarantee that the sale is not subject to FIRPTA. A valid non-foreign affidavit is an exemption from withholding and legally protects the buyer, even if the seller was fraudulent and tries to evade payment.
- Withholding Certificate: Even if the sale is subject to FIRPTA, the amount of tax required to be withheld under FIRPTA cannot exceed the total tax liability. Either the seller or buyer may apply for a withholding certificate allowing for a sub-10% withholding rate or installment payments. The applicant must file before or on the date of closing and provide acceptable proof of the application to the escrow agent prior to close. The withholding certificate application process typically takes 45 to 90 days but may vary. If the certificate is received prior to closing, the buyer can rely on it for zero or reduced withholding. Any required payment should not be sent to the IRS prior to receiving the Withholding Certificate.
The Safe Bet
A brief review of FIRPTA is only the beginning and should mainly help educate on the scale of its complexity. As with most things IRS-related, there are other rules, exemptions, and requirements that may apply. It is always incumbent on the seller to consult with an accountant or tax attorney who specializes in foreign investors as early as possible – ideally at acquisition – to help streamline reconciliation when it’s time to sell.
*Buyer must be an individual (not a corporation, estate, trust, etc.) and must use the property as a personal residence at least 50% time for a period of 24 months after closing.