A First Introduction to FIRTPA

What is FIRPTA?

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 especially if – after the sale – he or she does not own real estate property in the United States anymore.

Why FIRTPA creates a burden to the Buyer?

A question you may ask yourself is: why Buyer is involved in a tax matter that regards Seller? The answer is: because the solution that the IRS created to secure payment of taxes related to the capital gain on the transaction is to make the Buyer a withholding agent of Seller.

In fact, by definition Buyer has FIRTPA puts Buyer in charge of withholding and paying a portion of the purchase price to the IRS at closing, to cover the anticipated tax liability Seller will have as a consequence of 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 Seller of any credit he or she may have (or, in the rare case in which an additional income tax is due, Seller will have to pay the difference to the IRS).

How much needs to be withheld?

Seller shall withhold the 15% of the purchase price and pay it to the IRS within twenty (20) days after the date of the closing; the amount is considered as paid when the forms to be sent to the IRS are postmarked. The closing agent will perform this operation on behalf of Buyer; typically, the withholding appears as a debit on the Seller’s side of the closing statement.

The closing agent will cooperate with Seller’s tax lawyer or accountant for the preparation and the submission of the required documents to the IRS.

If Seller has never filed taxes in the United States and so he or she does not have a Social Security Number, an ITIN number can be requested simultaneously with the payment of the withholding to the IRS. Typically, Seller will need to provide a certified and apostilled copy of the passport.

There are special circumstances in which a reduced withholding, or no withholding, is required. Those circumstances will be better explained in another article.

Who is subject to FIRPTA?

Seller of real estate property in the United States is a subject to FIRPTA when he or she is not a US person but a foreign person for tax purposes. A foreign person is a nonresident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust, or estate. However, Buyer can rely on anaffidavit provided by Seller to determine what is Seller’s status, unless Seller has reason to believe that the affidavit is false.