FIRPTA is an acronym that stands for the Foreign Investment in Real Property Tax Act. FIRPTA is not a tax, it is 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.
Who’s responsible for the withholding?
FIRPTA regulations require that a Buyer withhold 15% of the gross purchase price of the property at the time of closing when they buy U.S. real property from a foreign person.
Who’s considered a foreign person?
You are considered a foreign person if you, the “Seller” of US real estate, are a non-resident individual, a foreign corporation that has not made an election to be treated as a domestic corporation, a foreign partnership, a foreign trust, or a foreign estate.
A resident alien, electing to be treated as a U.S. resident, is NOT considered a foreign person according to FIRPTA
What if the Buyer determines the Seller is not a foreign person?
The Seller can complete a Certification of Non-Foreign Status. The Buyer will then retain this certification for their records. Concluding, a Withholding is not required for this type of transaction.
What if the Buyer determines the Seller is a foreign person?
The Buyer should withhold 15% of the gross purchase price unless an exception applies and the withholding can be reduced. All funds must be submitted in a timely manner.
What’s considered timely manner?
The amount of money withheld must be submitted within 20 days following the day of closing. If a Withholding Certificate was applied for, any required funds must be submitted within 20 days of the Withholding Certificate notice.
What if the funds are not submitted on time?
Interest and penalties will be assessed beginning on the 21st day, after the date of transfer, and ending on the day the payment is received by the IRS. These fees are payable by the Buyer.