What is FIRPTA? FIRPTA is the Foreign Investment in Real Property Tax Act. The purpose of FIRPTA is to ensure foreign persons who own United States real estate property file the necessary tax documents regarding the sale or transfer of the U.S. property. While foreign persons who sell certain U.S. assets are not subject to capital gain on the sale (subject further to the 183-day rule), the same rules do not apply to the sale or transfer of U.S. real estate. Therefore, when a foreign person sells or transfers U.S. real estate, there are additional IRS processes and procedures the parties must go through to ensure tax compliance.
With proper planning (and obtaining the Form 8288-B necessary certificate), the tax impact may be minimized.
Here are five basic tips regarding FIRPTA:
Plan Ahead for FIRPTA
When it comes to real estate transactions, at least in California, the buyer holds all the cards.
At nearly every step of the purchase process (before contingencies are released) the buyer can walk away from the deal.
And, when FIRPTA is involved, it can delay the sale due to the time it can take to secure a withholding certificate.
That is why it is important that the seller work to obtain any necessary certificates (see below) at the earliest phase possible to avoid a long, drawn-out escrow — and risk the buyer bowing out due to changes in the market conditions, or just overall nuisance of the FIRPTA process.
What is a FIRPTA Withholding Certificate?
The FIRPTA withholding certificate is used to minimize the amount of the sale price that is withheld.
Here is an example of why it is necessary: Michelle is a foreign national who owns a U.S. property that she purchased for $800,000. She uses it as a rental property. Michelle sees the market declining and wants to pull the money out so that she is liquid to make other investments. She enters into a residential purchase agreement to sell the property for $840,000.
The capital gain on this type of sale is probably nil, once the expenses are factored into the sale price.
But, unless Michelle is able to obtain a withholding certificate, the US government will require that 15% of the sale price is withheld.
Gain vs. Sale Price
It is important to note the difference that the 15% that the US government withholds is based on the sale price and not the gain.
Form 8288-B Withholding Certificate
In order to avoid a 15% withholding, the transfer can apply for a withholding certificate using IRS form 8288-B.
If the form is accepted by the IRS, then the standard 15% withholding does not apply, and withholding based on the transfer or sale of the property will be reduced or eliminated.
Make Sure to File Timely
This is where it gets a bit tricky.
That is because it can take the IRS (even before COVID) can take upwards of 90 days to process the 8288-B request.
If the certificate is issued before the transfer of property, then no withholding may be required.
If the certificate is issued after the withholding it may speed up the time for a refund, and if you are familiar with dealing with the IRS — it would be in your best interest to apply before the transfer.
We Specialize in IRS Offshore Disclosure & Compliance
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance with getting compliant.