If you are a foreign national considering selling U.S. real estate, understanding FIRPTA withholding is crucial. FIRPTA stands for the Foreign Investment in Real Property Tax Act, a set of rules impacting how the IRS handles the taxation of these transactions.
Here is what you need to know:
What is FIRPTA Withholding?
When a foreign person disposes of U.S. real property interests, the buyer must generally withhold 15% of the gross sales price and submit it to the IRS. Think of it as a prepayment of the seller’s potential tax bill. This ensures that the IRS ultimately receives the tax owed on the sale, even if the seller is based outside the United States.
However, not every sale of U.S. real estate by a foreign person is taxed this way. There are exceptions depending on factors like the value of the property and how it is used.
Exemptions and Reductions
Let us explore some scenarios where you might be exempt from FIRPTA withholding, or where the withholding might be reduced:
- The $300,000 Home-Use Exemption: If you are selling a property for $300,000 or less, and the buyer intends to reside in the property for at least 50% of the time during the two years following the sale, you might be entirely exempt from FIRPTA withholding. However, this exemption is limited to specific circumstances, so it is best to always consult a tax professional.
- Reduced Withholding for Sales Between $300,001 and $1,000,000: When the sales price falls within this range, and the buyer still meets the residency requirements, the withholding rate can be reduced from 15% to 10%.
- Applying For Reduced Withholding: Even with sales above $1,000,000, applying for reduced FIRPTA withholding is possible. To qualify, you will need to demonstrate that your potential tax liability on the sale is likely to be significantly less than the standard 15% withholding amount.
Applying for Reduced FIRPTA Withholding: It is All about Timing and Preparation
The decision to apply for reduced withholding or simply remit the full amount often involves strategic timing.
If the closing is happening late in the year (October-December), the benefits of applying for reduced withholding might be minimal. The IRS often takes at least 90 days to process these applications. By the time you get approval, you might already be able to file a tax return to request a refund.
In addition to timing, applying for reduced withholding requires careful preparation. Here is what you will generally need:
- Proof of your original purchase price for the property
- Documentation showing you did not have prior FIRPTA liabilities
- Copies of invoices or receipts to demonstrate any improvements made to the property (this can lower your taxable gain)
- U.S. taxpayer identification numbers for both buyer(s) and seller(s).
We Are Your FIRPTA Experts
FIRPTA presents unique challenges – understanding the rules and knowing your options makes all the difference. At Quilca CPA Group, we specialize in helping foreign real estate investors navigate these complexities. We are not just number-crunchers – we are strategic partners dedicated to finding every legal, ethical way to lower your tax liability.
We will work with you to:
- Analyze your situation and determine the best path forward
- Guide you through every step of the application process for reduced withholding (if applicable)
- Ensure you file all necessary tax returns, minimizing your tax liability while staying compliant with the IRS
Your Trusted Partner in U.S. Real Estate Taxation
Do not let FIRPTA rules dampen your real estate goals. Reach out to us today at (786) 310-5582 or email us at [email protected] to schedule your personalized consultation. We are here to support your success!
