Paving the way for a smooth FIRPTA closing for a foreign national seller
Foreign national sellers of US real estate can take certain actions in advance of listing their property to ensure a smooth closing. All foreign sellers of US owned real are subject to the Foreign Investment in Real Property Tax Act FIRPTA Withholding. The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 10 percent of the amount realized (10% of contract sales price) on the disposition (special rules for foreign corporations). Certain exceptions to FIRPTA withholding exist.
A couple of steps can prepare a foreign seller for both an accurate estimation of their tax liability and a smooth closing:
- Start the FIRPTA withholding process prior to listing the property by seeking the advice of a qualified Certified Public Accountant and compiling all the necessary financial information (purchase closing statement , all expenses, etc) in advance of listing the property to make the application process more expedited.
- Hire a Certified Public Accountant with extensive FIRPTA withholding experience. Ask for referrals. Many CPAs attempt to submit a FIRPTA application and do not sufficiently understand the IRS FIRPTA unit processing procedure. Avoid delays by careful selection of your tax adviser.
- Allow 90 -120 days before closing to obtain the much coveted sample FIRPTA withholding certificate from the IRS authorizing the title company to reduce or vary from the 10% requirement.
- Plan that the title company or real estate attorney will withhold 10% and send in payment to the IRS unless you obtain a withholding certificate prior to closing. It is required by law and puts their buyer at risk of a tax lien (yes, that is how it works and thus title companies never wavering from this rule). This certificate give written permission for the title company to reduce or eliminate the withholding from the closing statement.
- Note that the payment being sent to the Internal Revenue Services does finalize or indicate the seller’s tax liability at 10%. This is only an advance tax payment in anticipation of the final tax return being filed by the foreign filer.The seller may be entitled to a refund of partial or all of the funds based on their calculated capital gains.
- Use a stand alone FIRPTA rider with the contract and allow estimated 90 days for closing. This rider puts your buyer on notice that you processing a FIRPTA application. Sample stand alone FIRPTA rider. If needed, a more detailed contract addendum can be prepared by a qualified attorney.
- Be aware that on properties under $300,000, the FIRPTA rule may be waived if the buyer signs an “intent to reside affidavit” . More conditions may apply.
With some advance planning, a FIRPTA sale planned correctly does not need to either cause a closing delay or financial hardship to a seller. Please contact us for a complimentary Florida contract review at 305-271-0100 or firstname.lastname@example.org
Watch our video on FIRPTA tax implications
Disclaimer: The Closing Company, Inc. is not providing legal or tax advice. Please consult with a licensed Attorney for legal advice or before signing any legal documents. Please consult with a Certified Public Accountant for tax advice.