What is FIRPTA?
FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980.
Who Does FIRPTA Affect?
FIRPTA affects any non-resident foreign individual and foreign companies not considered national corporations. From a tax perspective, when a non-resident individual or a foreign corporation or partnership sells a property within the United States, they are subject to FIRPTA provisions.
How Does It Affect?
At the time of closing, a 10% withholding on the sale price is applied for transactions below $1,000,000, and a 15% withholding for transactions above $1,000,000. For example, if a foreign investor sells a property for $350,000, the closing agent (the company or attorney handling the title) will withhold $35,000 in a special account called an escrow account until the foreign investor files their income tax return in January of the calendar year following the sale.
What is the Difference Between Withholding and Tax?
Withholding is the mechanism by which the IRS "forces" the individual or foreign company to file their return to determine if there is a gain or loss in the transaction. Once the return is filed and the IRS determines the tax amount, the difference between the withholding and the tax is refunded to the seller.
Can This Withholding Be Avoided?
It is crucial to give adequate attention and planning to this point to avoid negative surprises at closing. Whether to buy in a personal name or in the name of a company is one of the most important elements in the application of FIRPTA. However, it's not only the type of legal structure but also the internal constitution that can make a difference. Additionally, FIRPTA is just one of the factors to consider, so it is extremely important to understand the advantages and disadvantages of different purchase structures (LLC, S-Corp, Trust, Inc, etc.)
How Does This Affect Buyers?
As a buyer, you must ensure that the withholding is carried out if the seller is a "non-resident foreign individual or foreign company not considered a national corporation." Otherwise, you could be responsible for paying that withholding.
Enrique Vicente Urdaneta
Real Estate Advisor | eXp Realty | EVU Luxury Homes
305.209.6418
www.instagram.com/evuluxuryhomes
Disclaimer: The information presented in this article is intended to provide a general understanding of the topic. However, please note that I am a real estate agent, not a lawyer, accountant, tax, or financial advisor. This content should not be taken as legal, tax, accounting, or financial advice. The laws and regulations related to this topic can be complex and may change or expand in the future. Therefore, it is crucial to consult with a qualified professional, such as a specialized financial or tax advisor, before making any decision based on this information. As a real estate agent, I can provide various options and professional guidance related to the real estate aspects of your investment strategy, and for matters related to tax implications, legal issues, and financial planning, please consult with the appropriate professionals, which whom I have allies I can refer.
LEGAL NOTE: The provisions of FIRPTA are complicated and require the expertise of a real estate attorney or CPA who can complete the appropriate applications and evaluate the potential implications. At no time should this information be taken as advice.
