Complicated tax issues can arise when a U.S. buyer purchases real estate from a foreign seller. The Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer to withhold a portion of the sales price and pay it to the Internal Revenue Service.
These issues are complex, and there may be penalties to the buyer if the withholding is not done correctly. Get help from a Coral Gables FIRPTA lawyer to ensure your transaction goes smoothly. A real estate attorney could help you understand your rights and manage the process.
FIRPTA can apply whenever a seller is a foreign person, corporation, trust, or LLC. Single-member LLCs with a foreign owner are always subject to FIRPTA, but the law may not apply when an LLC has multiple members. A Coral Gables attorney could investigate the ownership of the LLC to assess FIRPTA implications well before the closing.
Foreign nationals and legal entities are subject to US capital gains tax on property sales. The burden is on the US taxpayer buyer to withhold up to 15 percent of the purchase price as a deposit on the seller’s capital gains taxes.
FIRPTA issues can derail a closing. It is essential for the buyer, seller, and their attorneys to investigate how the law will apply in their specific circumstances.
FIRPTA contains numerous exemptions that may apply in a specific case. One of the most widely used is the personal residence exemption.
FIRPTA withholding is not required when the buyer is purchasing the property to use as their personal residence and the purchase price does not exceed $300,000. When the purchase price is between $300,000 and $1 million, the buyer must withhold 10 percent of the purchase price. When the buyer pays $1 million or more for the property, they must withhold at FIRPTA’s standard 15 percent rate.
Buyers seeking to use the property as their personal residence must complete an affidavit certifying that they intend to occupy the property at least 50 percent of the time it is in use during the first two years after the title transfer. A credible Coral Gables attorney could draft and oversee the execution of a personal residence affidavit to ensure FIRPTA compliance.
FIRPTA requirements are addressed at closing. Typically, the buyer separates the amount required for FIRPTA withholding, and either the buyer’s attorney or the title company holds it in escrow. Within 20 days of the closing, the withheld amount must be transferred to the IRS.
The withholding serves as a deposit and may not reflect the seller’s actual tax liability. When the IRS receives the funds, it submits a Form 8288-A to the seller. The seller attaches that form to their next U.S. tax return and may receive a refund or be liable for additional capital gains taxes.
In some cases, a foreign seller can apply for relief from FIRPTA withholding before closing. In that case, the withholding agent keeps the FIRPTA withholding in escrow until the IRS makes a determination. A FIRPTA lawyer in Coral Gables could help a foreign seller prepare the request and supporting documents.
FIRPTA requirements are complex, and penalties for non-compliance can be severe. It is critical to work with a legal professional who is familiar with the law.
Jacqueline A. Salcines represents buyers and sellers in transactions implicating FIRPTA and handles all closings. Don’t go it alone – meet with a Coral Gables FIRPTA lawyer today.