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FIRPTA and the Withholding Tax on US Real Property

What is FIRPTA?

FIRPTA stands for the Foreign Investment in Real Property Tax Act. This Act is enforced by the Internal Revenue Service. Foreign national sellers have specific requirements that apply to them when selling US real property. If a seller is not a USA citizen or resident, FIRPTA requires a prepayment to the Internal Revenue Service of a withholding tax on the real property. The amount required to be collected at closing is calculated as a percentage. Generally, 15% of the gross sales price must be withheld and remitted to the Internal Revenue Service (IRS) within 21 days of closing unless certain conditions apply.

How does the Internal Revenue Service’s Foreign Investment in Real Property Tax Act (also known as “FIRPTA”) affect foreign national/non-USA resident sellers? Here is a brief explanation of the withholding tax regulation on real property and the limited exceptions:

Effective February 1, 2016

Buyer intend to use
as a Residence?
Sales price is
$300,000 or less
Sales price is greater than
$300,000 & not over $1,000,000
Sales price is over
YesExemption*10% withholding15% withholding
No15% withholding10% withholding15% withholding

*If an exemption is being taken under above guidelines and no remittance is being sent to the IRS, a buyer must sign an “Intent to reside” affidavit at closing.

Our Total FIRPTA ™ Services provides comprehensive services including seller representation and CPA services in-house for foreign national/non-USA resident sellers from pre-listing to post closing. Please contact 305-271-0100 or info@theclosingcompany for more information.

Frequent Questions and Answers on FIRPTA Transactions

Who withholds and sends in the 15% tax to the Internal Revenue Service?
The title company or attorney is required to send the funds to the IRS within 21 days of closing.

Does FIRPTA apply to individuals or corporations?
FIRPTA applies to both foreign national, non-resident alien individuals, and companies. This includes foreign companies that may be registered do to business in the USA but are still regarded by the Internal Revenue Service as foreign entities for tax purposes. Individuals holding USA citizenship, passports, or green cards are exempt from withholding. Certain other visas may be exempt, but please consult your tax advisor or Certified Public Accountant (CPA) for more information.

Are limited liability companies (LLC) formed in the USA subject to FIRPTA as well?
LLCs formed in the USA with a sole member who is a foreign national are required to withhold and are treated as a disregarded entity and subject to the standard withholding. If the company has more than one member, please consult your tax advisor or CPA for more information.

Why 15%?
This is the percentage required by the IRS to be remitted. This does not imply nor crystallize that a 15% tax liability exists. This is best viewed as a prepayment of potential taxes being secured at the disposition of the real property. The final tax liability may in fact be zero or more than 15%. The foreign national person or company would in the next tax year file a final tax return that states the actual tax liability. Additional monies or a refund may be due with that final tax return.

Can a seller pay less than 15% at closing?
Yes, if a seller obtains a Withholding Certificate from the Internal Revenue Service. Please allow 90 days for processing of this application. Without this certificate, the title company must withhold and remit the required 15%. We recommend allowing 90 days for the processing of your application to the IRS for your withholding certificate.

Should I hire a Certified Public Accountant to help me with FIRPTA?
Yes. FIRPTA applications and returns can be a complicated process riddled with delays and nuances. In addition, frequent follow up is required. The terminology is completely foreign to the layperson and hiring someone who can talk to the Internal Revenue Service on your behalf, as well as buyers and title companies, is a great investment. In addition to determining possible savings, a qualified CPA can save you time, money, and headaches on this matter. Note: Many CPAs do not have experience with FIRPTA and make some basic mistakes costing the taxpayer excess taxes or in some cases, delayed or cancelled closings. Plan ahead and hire an experienced CPA.

Does a foreign national need an individual taxpayer identification number (ITIN) to complete their sale?
Depends who you ask and what your scenario is. The IRS website says that yes, you need an ITIN number if you want to apply for a withholding certificate to reduce the amount withheld. The site goes on to say if you do not have an ITIN and need to remit funds after a sale, you can send in your funds and your application for an ITIN in simultaneous separate packages. Tax experts we interviewed on our blog post Does a foreign national need an ITIN # for a FIRPTA sale state that you do not need a ITIN to close the sale but will need one when/if you apply for a refund. Please consult your tax advisor or CPA for more information.

When should I start the FIRPTA process?
Immediately. As soon as the individual or company is considering selling the real property, they need to start planning for FIRPTA. The first point of inquiry should be a Certified Public Accountant and/or Tax Advisor to determine general tax liability. Then the seller needs to advise their listing agent that the sale will be subject to FIRPTA and provide potential buyer disclosures and meet the additional requirements. If the seller intends to apply for a withholding certificate, the contract should allow for a 90-day closing.