FIRPTA Foreign Investment In Real Property Tax Act

FIRPTA Foreign Investment In Real Property Tax Act

Image titleFIRPTA is short for 'Foreign Investment in Real Property Tax Act' (26 U.S.C. § 1445) the purpose of which is to collect taxes due on sale of real estate owned by foreign individuals or entities which do not pay US taxes.

FIRPTA is not a tax, it’s a withholding. A withholding is an amount held back used to pay potential taxes. The IRS implements a withholding on foreign sellers to make sure that they pay their fair share of taxes. In other words, the IRS will hold the potential tax owed “hostage” until the seller files a tax return to show what they actually owe. 

FIRPTA (Foreign Investment Real Property Tax Act), a law enacted in 1980, provides that if the Seller of real estate in the U.S. is a foreign person, the Buyer must withhold a tax of 10% of the selling price, to be held as a deposit, and remit that amount to the IRS at the time of closing. Effective February 16, 2016, the withholding tax will increase from 10% to 15% for certain properties. Below are the guidelines regarding the amount of withholding and when / if withholding may be avoided all together:

  • If the sales price is $300,000 or less and the property will be used by the buyer as a residence (as provided for in the current regulations), no sums need be withheld or remitted.

  • If the amount realized exceeds $300,000 but does not exceed $1,000,000 and the property will be used by the buyer as a residence then the withholding rate is 10% on the sale price.

  • If the amount realized exceeds $1,000,000, then the withholding rate is 15% of the sales price.

As it is the buyer’s or the closing agent’s responsibility to remit the tax withheld to the IRS, your real estate practitioner should be aware of the new rules affecting withholding rates. A foreign seller can reduce or eliminate FIRPTA withholding by timely applying for a withholding certificate – Form 8288-B

Note: In addition, effective Dec. 18, 2016, revised FIRPTA rules apply to real estate investment trusts (REITs) and foreign pension funds. 

VIDEO: ((The tax rate increased from 10 percent to 15 percent in December of 2015))

Important links:FIRPTA Withholding - IRS.gov 

The best advice a Real Estate Agent can give to a Foreign Seller is to obtain the advice of a US CPA and a Real Estate Attorney.

If you have a Real Estate Question, Contact Me.

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Dated: March 19th 2019
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About Ana Claudia: Ana Claudia Nascimento is a Sao Paulo-Brazil native. She speaks English, Spanish and Portuguese. A...

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