Breaking Down FIRPTA
Prior to 1980, it was possible for a person who was not a citizen of the United States to purchase real estate in the United States and then sell it at a profit without having to pay any taxes. To address this loophole, the IRS introduced the Foreign Investment Real Property Tax Act of 1980, or FIRPTA. According to this law, if the seller is not a United States citizen, the buyer is required to withhold a tax that is equal to 10 or 15 percent of the gross purchase price of the property. These funds are withheld as a sort of deposit toward the potential tax liability. To get a better understanding of how FIRPTA works and how it may affect you, it is helpful to break it down into simpler parts.
How Do I Calculate the Correct FIRPTA Withholding Rate?
According to FIRPTA, you have to withhold 10 percent of the purchase price of the property if the cost is between $300,000 and $1,000,000 and the property will be used as the buyer’s residence. If the sales price is more than $1,000,000, the rate is 15 percent regardless of how the property is to be used.
When Do I Have to Pay FIRPTA?
If you are not a resident of the United States and you own property in the United States, you will not have to pay FIRPTA until you decide to sell the property. If you have no plans to sell the property, FIRPTA will not affect you. Nonetheless, even if you do plan to keep the property, it is important to know that you will have to pay this tax if you decide at a later date to sell.
Is the Buyer Responsible for Paying FIRPTA?
When purchasing property from someone who is not a citizen of the United States, the buyer is required to withhold 10 or 15 percent of the purchase price from the seller. This is not an extra fee charged to the buyer. Rather, it means the seller receives 10 or 15 percent less than the agreed upon purchase price of the property. The buyer then uses these funds to pay the FIRPTA tax, with the Closing Agent being responsible for forwarding these funds to the IRS within 20 days after the closing date. If the IRS does not receive this payment from the buyer, the IRS can then seize the property and other assets from the buyer until the tax is paid.
How Do I Get a FIRPTA Refund?
While the standard withholding amount is 10 to 15 percent, this is not necessarily the actual amount that you will be required to pay. Rather, the IRS holds onto these funds until it is satisfied that all of the required taxes are paid. If your actual tax liability does not come to this amount, you can apply for a refund.
To apply for a refund, you will need to file a U.S. tax return for every year you received rental income from the property. You will also need to file a final U.S. tax return the year after the sale in order to report the sell of the property. This process can take up to eighteen months to complete.
Another option is to file tax returns for the previous years along with an application for Early Release of Cleared Withholding prior to or on the closing date. In this scenario, the Closing Agent retains the withholding while the IRS processes the application and issues a Withholding Certificate for the funds. This process usually takes around 90 days.