FIRTPA Basic Exceptions
FIRTPA is harsh but there are many exceptions and exclusions from its application: here a list of the most frequent ones
What is FIRPTA?
FIRTPA is the acronym for Foreign Investment in Real Property Tax Act. The purpose of the act is to address the concern that it would be extremely difficult, if not impossible, to collect income tax from a taxpayer who resides abroad, especially if – after the sale – he or she does not own real estate property in the United States anymore.
Exceptions to FIRTPA
FIRTPA rule is that the Buyer shall withhold 15% of the purchase price of a real estate transaction. As for every rule, it has certain exceptions: here we provide a list of the most common ones:
- The price of the property is no more than $300,000 and Buyer, an individual, bought it to use it as his or her primary residence or as the primary residence of his or her family. Specifically, the Buyer or a member of the Buyer’s family has a definite plan to reside at the property for at least 50% of the days within each of the two 12-month cycles following the date of transfer. When counting the number of days that the property is used, do not count the days the property will be vacant.
The Buyer is liable for failure to withhold if he or she does not reside at the property as required by the exception; however, the Buyer can establish that the failure to reside has been caused by a change in circumstances that could not have been reasonably anticipated at the time of closing, such as the need of more space to accommodate a newborn child, divorce, change of job that require moving.
- Seller of the property sold is a domestic corporation whose any class of stock is regularly traded on an established securities market, or it is a publicly-traded partnership or trust, except in the case of a disposition of a substantial amount of a non-publicly traded interest in a publicly-traded corporation.
- Seller gives a certification to the Buyer or the closing agent stating, under penalties of perjury, that the Seller is not a foreign person and containing the Seller’s name, U.S. taxpayer identification number, and mailing address.
- Buyer receives a withholding certificate excusing withholding issued by the Internal Revenue Service.
- The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
- The property is acquired by the United States, a U.S. state or possession, a political subdivision, or the District of Columbia.
Unless Buyer or his or her agent knows that the certification Seller provided is false, Buyer can always rely on it and it goes exempt from every sanction in connection with the veracity of the statement.
Buyer can be required to furnish a copy of the certification to the IRS promptly and following a certain provision; should Buyer fail to do so in the time and manner prescribed, the certification will not be effective.
Liability of Buyer, its agents, and Withholding Agent
If Buyer, its real estate agent or the closing agent has actual knowledge that the certification is false, the real estate agent or the closing agent must notify Buyer, or they will be held liable for the tax within the limit of the compensation received for the transaction.
However, a Withholding Agent is personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest. A Withholding Agent is any person having the control, receipt, custody, disposal, or payment of income that is subject to withholding.
You are protected in a FIRTPA situation as typically the Withholding Agent personally covers the risk connected to the withholding, but having somebody who has experience in international real estate transactions and who knows exactly how to face their challenges helps.