Foreign Investment in Real Property Tax Act (FIRPTA) withholding is the tax that is applicable on selling US real property by the foreign sellers. Any individual who is considered to be a foreign person as per US law will have to comply with the rules and regulations of FIRPTA when they are selling real property in the US.
In this article, we will be discussing the important aspects of FIRPTA withholding and why it is important for both the buyers and the sellers to be familiar with it. So, let’s get started:
Background of FIRPTA
FIRPTA was introduced in 1980 by the US Congress to handle the problems associated with the increasing foreign ownership of properties in the USA. The primary goal of FIRPTA was to make the tax systems fairer and more transparent, especially the tax procedures that deal with the transactions of US real properties between foreign and local investors. Generally, FIRPTA has managed to gain significant popularity because it facilitates the targeted deals in an efficient and reliable manner,
FIRPTA for Sellers
The official documents of the IRS make it clear that FIRPTA is applicable on the disposition of the US real property interest by a foreign person. Before the introduction of FIRPTA, there was no clear or specific law that dealt with such a situation. However, FIRPTA authorized the US government and tax bodies to tax foreign persons who are selling their real property in the USA.
It is important to note that the disposition of the real properties is not only limited to selling the properties. Instead, it also involves exchange, liquidation, gift, or transfer of the US real properties. It is the responsibility of the person(s) buying the US real property interests from the foreign persons and the agent handling the transaction to withhold 15% of the amount decided at the time of the disposition.
Generally, the buyer himself or herself will be acting as the withholding agent. The buyer and the agent must be aware of the FIRPTA regulations because if a transferor is a foreign person and you do not withhold the tax, you can be held liable for the tax. Moreover, in other situations in which a US corporation is disposing of a US real property interest, then the company itself will be acting as the withholding agent.
FIRPTA for Buyers
In the majority of the cases, an individual or company who is buying real property in the US is liable for withholding 15% of the amount decided at the time of transaction. However, it is also important to note that the total withheld amount should never be more than the maximum tax liability. Therefore, it becomes necessary for the IRS to determine the overall tax liability of the seller before withholding the amount.
Role of FIRTPA Withholding Certificate
Many sellers and buyers often ask the question that when is a FIRPTA certificate required while dealing with real properties in the US. Generally, the process of acquiring a withholding certificate is quite easy.
FIRPTA withholding certificate is a reliable way of reducing or even eliminating the required withholdings. The law makes it clear that both sellers and buyers can apply for FIRPTA withholding certificates. It is the responsibility of the IRS to issue a withholding certificate. It is highly recommended that you apply for the withholding certificate as soon as possible because you should obtain it before finalizing the sale.
The FIRPTA withholding certificate will allow the buyer to withhold a lesser amount or even avoid withholding at all. However, until the FIRPTA certificate is issued, the buyer must withhold 15% of the total sale cost. If the amount withheld is greater than the amount decided after issuing the withholding certificate, then the seller will have to apply for a refund.
Exceptions to FIRPTA
There are some situations in which FIRPTA withholding is exempted, such as:
- The individual who is selling the US real property is not a foreign person.
- The transactions associated with qualified foreign pension funds (QFPF) are exempted from most of the FIRPTA withholding. However, such exceptions greatly vary on the basis of the different cases.
- Publicly traded exceptions.
By knowing these important factors about the FIRPTA withholding amount and FIRPTA withholding certificate, the sellers and buyers will find it quite easy to go through the process of applying for the certificate and obtaining it. These factors should be kept in mind whenever you are dealing with the transactions of US real properties between foreign persons and local individuals or companies.