The Foreign Investment in Real Property Tax Act (FIRPTA) requires U.S. property buyers to withhold a portion of the purchase price when they buy property from foreign owners. Failing to anticipate the FIRPTA obligation can delay closing, and failing to make the required withholding can lead to penalties.
Whether you are a foreign seller or a U.S. buyer, it is critical to retain a real estate attorney who is knowledgeable about federal law. A Miami FIRPTA lawyer could effectively manage your closing involving foreign sellers, giving you peace of mind.
FIRPTA applies to sales of property held by foreign persons. A foreign person, for the purposes of this law, is an individual who is a citizen of another country and not a permanent resident of the U.S. Foreign corporations, partnerships, trusts, and estates are also subject to FIRPTA.
FIRPTA applies to the disposition of property held by a foreign person or entity. Disposition means a sale, gift, exchange, or distribution to a shareholder, partner, or beneficiary. An attorney in Miami could investigate whether a specific transaction is a disposition under FIRPTA.
When a U.S. purchaser buys real property from a foreign owner, the purchaser must withhold a portion of the purchase price and remit it to the IRS. The withholding is essentially a pre-payment of the foreign owner’s capital gains tax on the sale. If the U.S. buyer fails to make an appropriate withholding and remit it timely, the buyer is liable for the tax plus interest and penalties.
FIRPTA withholding is typically 15 percent of the purchase price, although the percentage could be higher or lower depending on circumstances. When the transaction closes, the buyer’s attorney or title company can act as the withholding agent and put the appropriate percentage of the purchase price into escrow.
The withholding agent must remit the withheld amount along with Form 8288 to the IRS within 20 days of the closing. The IRS will send the seller Form 8288A, which the seller must include with their next tax return. The withheld amount will be applied to the seller’s capital gains liability on the sale, and the seller may receive a refund or have to pay additional tax.
A seller can apply for a reduced withholding amount or an exemption before closing. Sellers seeking to change the FIRPTA withholding obligation should consult a Miami lawyer to ensure their application and supporting documentation are accurate. A percentage of the purchase price will still be withheld from the seller, but if the IRS approves the application, the seller will receive a refund of the excess withholding immediately, rather than having to wait until they file their tax return.
FIRPTA withholding is not necessary in every case. The law contains several exemptions that reduce the withholding required or eliminate it entirely.
For example, if the purchaser intends to use the property as their personal residence and the purchase price is less than $300,000, no withholding is required. If the purchase price is between $300,000 and $1 million, the purchaser must withhold 10 percent. The full 15 percent withholding applies if the purchase price exceeds $1 million.
There are other exemptions that apply in various circumstances. An experienced FIRPTA attorney in Miami could closely review a transaction to determine whether an exemption might apply in a specific case.
FIRPTA rules are complicated, and the penalties for violating them can be severe. If you are a foreign seller or purchasing from a foreign seller, it is crucial to hire a Miami FIRPTA lawyer.
Don’t go it alone – seek the services of Jacqueline A. Salcines, P.A. today to get started.