The US offers many incentives to foreign real estate investors: NO visa required and generous tax deductions! However, at the time of sale, a foreign investor might be surprised by the “FIRPTA” tax on his closing statement. Below the FIRPTA mechanism explained and how to get your tax refund back as quickly as possible!
What is FIRPTA?
The Foreign Investment in Real Property Tax Act (FIRPTA) was passed in 1980 and imposes a tax withholding on the sale of real estate by a foreign person. The act functions as a “prepayment” of tax that is anticipated to be due on the sale. The prepayment the year of sale ensures that the IRS will collect any tax due – in the event the foreign national does not report his sale voluntarily to the authorities the year after the sale.
Who is subject to FIRPTA?
A foreign “person” under FIRPTA includes the following:
1/ An individual who does not hold U.S. citizenship
2/ An individual who does not hold permanent residence (Green card ) . To read more on The Green card: https://kbfinancials.biz/la-carte-verte-am-ricaine-us-green-card/
3/ An individual whose presence in the United States does not meet the Substantial presence test. To read more on Substantial Presence Test: https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test
4/ A Single Member LLC (disregarded entity) with a foreign member – because its activity is taxable at the level of its member.
5/ A Corporation (USRPI – US Real Property Interest) with foreign shareholders and at least 50% of its assets in real estate.
What is the FIRPTA withholding rate?
The FIRPTA withholding rate is 15% for sales made by individuals and 21% for sales made by entities.
Who is responsible for withholding the tax?
The buyer of a U.S. real property is responsible for withholding FIRPTA from the sales price, filing forms 8288 &8288-A and remitting the tax to the IRS within 20 days of date of the sale. The buyer is subject to paying the tax and to penalties if he fails to withhold properly and timely.
How does the seller recover the FIRPTA withholding?
If no exceptions applied to the FIRTPA withholding, the year AFTER the sale, the foreign seller files a US tax return (Form 1040NR) which calculates the tax actually due on the realized capital gain . Any over-payment of tax is refunded.
Important: to recover the FIRPTA refund, the seller must hold a US tax identification number (ITIN) – To read more on how to obtain an ITIN – https://kbfinancials.biz/itin-services/
Are there exceptions to FIRPTA?
There are many exceptions that exempt the foreign seller from FIRPTA. The 2 most common exceptions are:
- Future use of the property by the buyer = when the buyer uses the property as his primary residence and the sale price is less than $300K.
- Sale through an exchange 1031 (or “like kind exchange”) = when the seller reinvests immediately in a similar real estate property (“non recognition transaction”)- To know more about 1031 exchange: https://kbfinancials.biz/5-tax-free-real-estate-transactions/
- Other exceptions = https://www.irs.gov/individuals/international-taxpayers/exceptions-from-firpta-withholding
As always, bear in mind the date of this article as tax laws change over time
For assistance with your international tax needs, please contact Karine Bauer, EA, JD – HERE.
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Updated March 8th, 2023