FIRPTA (Foreign Investment in Real Property Tax Act)

This will provide you with an overview of the rules and regulations of FIRPTA and how it may apply to you.

What is FIRPTA?


Congress enacted the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) to impose a tax on foreign persons when they sold a U.S. real property interest. A foreign person includes a nonresident alien or foreign partnership, trust, estate or corporation that has not elected to be treated as a domestic corporation under IRC §897(i). For U.S. property dispositions subject to FIRPTA, the transferee (purchaser) is required to withhold and remit to the IRS 10% of the gross sales price to ensure that any taxable gain realized by the seller is actually paid. The withholding rate is computed differently for other foreign entities, such as foreign corporations and trusts, which are required to withhold 35% of the capital gain realized on the sale. For more information on FIRPTA, visit: www.irs.gov and download Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities.

Common Forms Needed


  • W-7 (application for IRS Individual Taxpayer Identification Number)
  • 8288-B (Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests)

3 Exceptions to FIRPTA


1. Property to become buyer’s personal residence. Section 1445 (b)(5) provides an exemption for property acquired by a transferee that will be used as the transferee’s personal residence. To qualify for the exemption, a closer will generally require the transferee to sign an affidavit stating that the amount realized (generally sales price) is not more than $300,000, and that transferee or a member of their family intend to use the property as a personal residence for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer.

2. Seller declaration of non-recognition of gain or loss. The second exception to the FIRPTA withholding requirements is in the case of a simultaneous 1031 exchange. This is a less common exception and is not discussed in detail here. For more information on this exemption please consult with a CPA, tax attorney or the IRS.

3. The third exception is for transactions in which the IRS has issued a withholding certificate (“Withholding Certificate”) to the foreign seller. The amount that must be withheld by a buyer can be reduced or eliminated pursuant to the Withholding Certificate. The transferee, the transferee’s agent or the transferor may request a Withholding Certificate. The IRS will generally grant or deny an application for a Withholding Certificate within 90 days after its receipt of a completed Form 8288-B application.

Disclaimer


The information contained in the following is intended to be reviewed by all interested parties and it should not be transmitted, copied, or relied upon as complete when it comes to FIRPTA. It is an illustration with brief details about FIRPTA. This presentation has been prepared to provide summary, unverified information in regards to FIRPTA. The information contained herein is not a substitute for a thorough due diligence investigation. Chad Creech has not made any investigation, and makes no warranty or representation. The information contained in this presentation has been obtained from sources we believe to be reliable; however, Chad Creech has not verified, and will not verify, any of the information contained herein, nor has Chad Creech conducted any investigation regarding these matters and makes no warranty or representation whatsoever regarding the accuracy or completeness of the information provided. All parties viewing this must take appropriate measures to verify all of the information set forth herein and bears all risk for any inaccuracies. We highly recommend you speak with a CPA, Attorney, or other qualified person to discuss your option with regards to FIRPTA. Be aware that it is the responsibility of the buyer to collect from the seller with regards to FIRPTA.


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Graphic to help determine if FIRPTA applies