FIRTPA is the acronym of Foreign Investment in Real Property Tax Act. 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 and who does not own real estate property in the United States anymore after the sale.
Buyer is a withholding agent for the seller: in other words, FIRTPA puts the buyer in charge of withholding and paying the 15% of the purchase price to the IRS at closing, to cover the anticipated tax liability of the seller deriving from the sale. The final taxable amount is determined when the tax return is filed in the year following the transaction: at that time the IRS will directly refund the seller of any credit he may have (or, if any additional income tax is due, the seller will have to pay the difference to the IRS).
The seller shall withhold the 15% of the price and pay it to the IRS within twenty (20) days after the date of the closing. The closing agent will perform this operation on behalf of the buyer; typically, the withholding appears as a debit on the seller’s side of the closing statement.
The closing agent will cooperate with the accountant for the preparation and the submission of the documents.
If the seller has never filed taxes in the United States and so he does not have a Social Security Number, an ITIN number can be requested simultaneously with the payment of the withholding to the IRS.
There are special circumstances in which a reduced withholding, or no withholding, is required. Those circumstances will be better explained in another article.
The seller of real estate property in the United States is a subject to FIRPTA when he is not a US person but a foreign person for tax purposes. The buyer can rely on the affidavit provided by the seller to determine what is the seller’s status, unless the seller has reason to believe that the affidavit is false. A foreign person is a nonresident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust, or estate. Each of those categories need to be examined separately:
A seller who is a US citizen or a US permanent resident/green card holder is exempt from FIRPTA withholding.
If the seller does not have US citizenship or a green card, he can still be considered a US person for tax purposes if he passes the substantial presence test, which consider whether the individual has spent sufficient time in the United States to make him subject to taxation. But how does the substantial presence test work?
The substantial presence test is met when the individual has been in the United States:
Finally, the substantial presence test has its own exceptions. For example, if the person is present in the United States under a F Visa (student visa) he or she will be considered non-US persons for tax purposes and so subject to FIRTPA.
US entities are not subject to FIRTPA. Once again, it will be necessary to determine who is considered to be a US entity.
To be considered as a US person for FIRTPA purposes, a trust needs to pass a two prong test:
This material has been prepared for informational purposes only in connection with the disposition of real estate property between unrelated parties and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. you should consult your tax, legal, or accounting firm before engaging in any transaction involving FIRTPA.
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