When real property is sold by a foreign person in the United States, buyers, attorneys, real estate agents, and title companies need to be aware of a potential trap contained in the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Under FIRPTA, the buyer is required to withhold 15% of the gross sales price, or the “amount realized,” to ensure any taxable gain realized by the seller is actually paid to the IRS. This additional withholding tax is due by the buyer from the sale to the IRS.
The “amount realized” is the sum of the cash paid or to be paid (principal only), the fair market value of other property transferred or to be transferred, and the amount of any liability assumed by the buyer immediately before and after the sale. The buyer must send the 15% withholding amount to the IRS within 20 days of closing.
There are three possible exemptions from the FIRPTA requirement:
(1) Seller Declaration of Non-Recognition of Gain or Loss. If the 15% withholding amount is more than the tax liability, the buyer can be exempt or pay a reduced amount. In this case the foreign person selling the real estate can apply for a withholding certificate to reduce the amount withheld. If the amount realized is zero, the buyer may be completely exempt from FIRPTA. While this certificate is pending with the IRS, the buyer may wait to send any amounts ultimately deemed to be owed by the buyer.
(2) Property to Become Buyer’s Personal Residence. If the sales price is $300,000 or less, and the buyer or family member intends to use the real property as a personal residence, then no amount needs to be withheld.
(3) Transaction in which IRS Issues a Withholding Certificate to Foreign Seller. The IRS may grant a certificate whereby the amount a buyer must withhold can be reduced or eliminated pursuant to a Withholding Certificate.
For more information about FIRPTA and its implications for you and your business, contact Rosenblatt Law Firm.