Wednesday, September 05, 2018 / by Dani Drissi-Means
First, let me start by throwing out this common misconception; FIRPTA is not a penalty tax. Yes, I said it. FIRPTA is not a penalty tax. Almost anyone who tells you this doesn’t know what FIRPTA really is. FIRPTA is not a penalty tax on Foreigners but rather a tax withholding requirement on Foreigners. In the end, withholding rates are the same as U.S. Citizens, nothing is different. The tax is on the capital gains, not the gross sales price unless the entire amount is considered capital gains.
How much is withheld?
As of February 2016, withholding went up to 15%, unless you qualify for exceptions. We will go over these possible exceptions briefly later. Again, this amount is based on the capital gains. For example, let’s say you purchased a home in 2002 for $100,000 and you are selling it today for $150,000.00. Your capital gains would be $50,000.00 on this transaction. The withholding would be 15% of the capital gains which in this case is $50,000.00 for a total of $7,500 withholding.
Do I get any of my money back?
In short, yes, you can get a portion of your money back. You will always want to consult with an accountant and an attorney prior to listing your home for sale or prior to purchasing future property to best understand your options and rights. You will have to file taxes in the United States in order to receive any refundable amount. You will need a Tax Identification Number for this and you can file Form W7 (ITIN) with the I.R.S. by letting them know you intend to sell your home and withhold taxes. If you already have an ITIN you will need to verify it is still active as they do expire. Please consult with a tax accountant for this. It is best to do this prior to listing your property for sale.
Can I do a 1031 Deferred Exchange?
You can only do a 1031 Deferred Exchange on an investment property and it has to have been held for at least 2 accounting periods. If it is an investment property, the landlord must document earnings and have filed tax returns annually or you can’t qualify for this.
Who is a Foreigner?
Here is a quick guide to know if you are considered a Foreigner under FIRPTA. Again, it is always best to consult with an accountant and an attorney.
-Non-Resident Aliens (even with a Social Security number)
-Foreign Corporations that have not elected to be treated as domestic corporations.
- Foreign Partnership, Trusts or Estates
- Disregarded Entities (i.e. sole member LLC’s)
In order to be considered a Resident Alien (not subject to 15% withholding) you must meet the Green Card Test or Substantial Presence Test and have a tax identification number.
US Citizens must have a tax identification number or they will be subject to 15% withholding.
Can I get my refund back quicker?
Yes, there are options for you to get your money back quicker. You will need a Tax Identification Number for this so it is important you file for it as soon as you can if you do not already have a valid one. FIRPTA Form 8288B – Application for Withholding Certificate can get your money back in your pocket sooner. However, it is very time sensitive. You will need to file it as soon as you have a contract on your property. It takes 90 days to get an answer back from the IRS. If the form is Pending the Escrow Agent can hold the 15% in escrow and remit within 20 days of hearing back from the IRS. You will still have the duty to file the tax return at the end of the year.
What is another top misconception when dealing with FIRPTA?
I would say it is that FIRPTA does not apply when selling property under $300,000.00. You still have to qualify the property for this exemption. And actually, it is the buyer who has to qualify the property for this exemption, not the seller. If the purchase price is under $300,000 and the property is residential property and an individual buyer intends to occupy the property for at least ½ the time the property is in use during each of the first 2 years after closing, the 15% withholding could be avoided if the buyer is willing to sign the appropriate affidavit at closing. If the purchase price is over $300,000.00 up to $1,000,000.00 and buyer is willing to the appropriate affidavit at closing, the withholding will be 10%. The calculation must be done separately for each of the two twelve month periods. This exemption does not apply to vacant land even if the buyer intends to and builds a house on the vacant land. Buyer is responsible to the IRS if they fail to meet these requirements unless such failure was not reasonably foreseeable; therefore, don’t count on most buyers agreeing to sign the affidavit.
Lastly, is FIRPTA required on Short Sales?
Yes, FIRPTA is still required on Short Sales. Short Sales on Foreign-owned properties have to request a special exemption first, which is hard to get.
As always, you will want to ensure you consult with an accountant and attorney prior to selling or buying property as a Foreign individual/Entity and partnering with the right professionals is key to understanding the process of selling your home as a Foreign Individual/Entity, buying a home from a Foreign Individual/Entity or even buying a home from a Foreign Individual/Entity as a Foreign buyer.
Please contact us if you should have questions or want assistance with the Sell or Purchase of a home as a Foreign Individual/Entity. We would love to assist and guide you through the process and ensure you are in contact with the right professionals from beginning to end to make sure you have a successful and smooth transaction.
Life-Style Realty is a Dallas-based Real Estate Firm that currently Brokers throughout the Dallas/Fort Worth Metroplex. To find out how to work with us, visit JoinUs.Life-StyleRealty.com or call 469-567-3191.