![FIRPTA: What Foreign Real Estate Investors Need to Know About It [2024]](https://homeabroadinc.com/wp-content/uploads/2024/11/FIRPTA-500x325.jpg)
Key Takeaways:
➡️ FIRPTA requires buyers to withhold a percentage of the sales price from foreign sellers of US property.
➡️ The standard withholding rate is 15%, with potential reductions or exemptions based on the sale price and buyer’s intent.
➡️ Foreign sellers must file a US tax return to report the sale and may claim a refund if overwithheld after paying capital gain taxes.
Table of Contents
Imagine you’ve found the perfect property in the US, an investment you’ve been planning for years. But as a foreign investor, there’s one crucial detail you might not know—selling this property could mean a portion of your sales proceeds will be withheld to cover potential capital gains tax.
This withholding isn’t an additional tax but an advance on your capital gains tax liability, which can be reclaimed when filing your tax return if the amount withheld exceeds what you owe.
The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted to ensure the IRS collects its share (capital gains tax) from the sale of US real property interests owned by foreign persons. Missing out on FIRPTA’s details could cost you significantly.
Let’s go through everything you need to know about FIRPTA withholding and how to protect your real estate investment.
What Is FIRPTA?
The Foreign Investment in Real Property Tax Act of 1980 is a US tax law designed to collect taxes from foreign persons who sell US property incurring capital gains.
FIRPTA requires buyers of US real property interests from a foreign seller, called a transferor, to withhold a percentage of the sales price and remit it to the Internal Revenue Service (IRS). This tax withholding acts as an advance payment toward the seller’s potential income tax liability.
Who Is Affected by FIRPTA?
FIRPTA applies specifically to foreign persons, which includes:
- Non-resident aliens (individuals who are not US citizens or residents).
- Foreign corporations, partnerships, trusts, or estates. Foreign sellers of US real property must comply with FIRPTA withholding requirements when selling their property.
Note: Foreigners on a US visa (e.g. H1B visa) are not subject to FIRPTA withholding as they are considered US residents for tax purposes.
Sellers that meet these criteria must comply with FIRPTA withholding requirements. Failure to comply can lead to penalties, making it critical for both sellers and buyers to understand their roles in the transaction.
FIRPTA Withholding Requirements
Under FIRPTA, the buyer of the property, known as the withholding agent or transferee, is responsible for withholding and remitting the appropriate amount of tax to the IRS.
The general withholding rate for foreign persons is 15% of the gross sales price, not the capital gain or profit.
This withholding serves as a precaution to ensure the IRS collects taxes from non-resident property owners.
General Withholding Rate
The general FIRPTA withholding rate is 15% of the gross sales price of the property, regardless of the seller’s gain or loss on the sale.
For example, if a foreign person sells property for $500,000, the buyer is required to withhold $75,000 (15% of $500,000) and remit it to the IRS.
Exceptions to FIRPTA Withholding
While the general withholding rate is 15%, there are several exceptions that foreign sellers and buyers should be aware of:
| Sale Price | Buyer’s Intent | Withholding Rate |
| Under $300,000 | Personal residence | No withholding |
| $300,001 – $1,000,000 | Primary residence | 10% |
| Over $1,000,000 | Any intent | 15% |
How to Calculate FIRPTA Withholding
FIRPTA withholding is calculated based on the gross sales price of the property, not the profit. This means the amount withheld is determined by the total sale price, including any outstanding loans or mortgages, and does not consider closing costs or other adjustments.
Here’s a step-by-step guide to calculating FIRPTA withholding:
Determine the Sale Price: Identify the total gross sales price of the property.
Apply the Withholding Rate: Depending on the sale amount and buyer’s intent, apply the appropriate withholding rate:
- 0% for sales under $300,000 if the buyer will use the property as a primary residence.
- 10% for sales between $300,001 and $1,000,000 if the property will be used as a primary residence.
- 15% for all other sales.
Calculate the Withholding: Multiply the gross sales price by the withholding rate to determine the withholding amount to be sent to the IRS.
Let us understand FIRPTA Withholding Calculation with the help of an example
A foreign seller sells a property for $850,000. The buyer plans to use the property as their primary residence, so the withholding rate is 10% (due to the sale being between $300,001 and $1,000,000 with intent for personal residence).
Step-by-step Calculation:
- Gross Sales Price: $850,000
- Applicable Withholding Rate: 10%
- Withholding Amount: $850,000 X 0.10 = $85,000
Thus, the buyer must withhold $85,000 and remit this amount to the IRS as part of the FIRPTA requirement.
FIRPTA and Tax Filing Obligations
After the sale is completed, the foreign seller has further obligations to fulfill. FIRPTA withholding is just an advance payment toward the potential income tax liability, and the seller must file a tax return to determine the exact amount owed.
If the withholding exceeds the actual taxes, the seller can claim a refund.
Key Post-Transaction Steps for Foreign Sellers
File a US Tax Return:
Foreign sellers must file a US federal tax return (Form 1040NR for individuals or the equivalent for entities) to report the property sale and calculate their actual tax liability.
Calculate Capital Gains Tax:
- FIRPTA withholding is based on the gross sales price, not the net profit.
- The actual tax owed is calculated on the capital gains (sales price minus purchase price and allowable deductions).
- Filing a tax return is essential to determine whether you owe more taxes or are entitled to a refund.
You can get more information on Capital Gains Tax here.
Submit Required IRS Forms:
To comply with FIRPTA and potentially claim a refund, sellers must submit specific IRS forms, detailed below.
IRS Form Requirements for FIRPTA
- Form 8288 (US Withholding Tax Return for Dispositions by Foreign Persons of US Real Property Interests):
The buyer (or the withholding agent) is required to file Form 8288 with the IRS within 20 days of the sale. This form reports the withholding and sends the withheld amount to the IRS.
- Form 8288-A (Statement of Withholding on Dispositions by Foreign Persons of US Real Property Interests):
Along with Form 8288, the buyer must also file Form 8288-A, which details the amount withheld from the sale. The IRS will then stamp this form and send a copy to the seller for their records.
- Form 8288-B (Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests):
If the seller believes the FIRPTA withholding exceeds their actual tax liability, they can file Form 8288-B to request a withholding certificate.
This certificate allows for reduced withholding or a refund if overwithheld. The seller must submit this form before or at the time of the sale to reduce the withholding amount.
How Foreign Investors Can Claim a Refund if Overwithheld
If the amount withheld under FIRPTA exceeds the actual tax owed by the foreign seller, they can claim a refund by filing a US tax return (Form 1040NR) for the year the sale occurred.
The IRS will process the return and calculate the actual tax liability. If the withholding exceeds the taxes owed, the seller will receive a refund for the difference.
Key Steps to Claim a Refund:
- File Form 1040NR (or relevant tax return for entities) with the IRS.
- Attach Form 8288-A to the tax return to provide proof of withholding.
- Provide documentation of the property sale and calculations for the actual tax owed.
- Wait for the IRS to process the return and issue any refund due.
Understanding FIRPTA with a Real-life Case
Still confused about how FIRPTA works? This case scenario is going to clear all that –
A foreign investor purchases a property in Florida for $1.2 million. After holding the property for five years, they sell it for $1.6 million.
Breakdown of the Sale Proceeds and FIRPTA Withholding
- Purchase Price: $1.2 million
- Sale Price: $1.6 million
- Capital Gain: $400,000
Under FIRPTA, the buyer is required to withhold 15% of the gross sale price.
FIRPTA Withholding Calculation:
1.6 million X 0.15 = 240,000
The buyer withholds $240,000 and remits it to the IRS on behalf of the foreign seller.
Tax Filing and Potential Refund
- The seller needs to file a US tax return to report the capital gain of $400,000.
- Assuming the actual tax liability on the gain is $60,000, the FIRPTA withholding exceeds the tax owed.
- The seller can claim a refund of the difference: 240,000 (withheld) – 60,000 (tax liability) = 180,000 (refund)
Thus, the foreign seller is eligible to receive $180,000 back after filing their tax return and providing the necessary documentation, such as Form 8288-A.
Tax Implications of FIRPTA for Foreign Investors
In addition to FIRPTA withholding, foreign investors must consider capital gains taxes when selling US property. Here’s an overview:
US Capital Gains Tax
Foreign sellers are subject to capital gains tax on any profit from the sale of US real estate. The tax rate typically ranges from 15% to 20%, depending on the seller’s total income and residency status.
You can get more information on Capital Gains Tax here.
Double Taxation Treaties
Foreign sellers may be concerned about being taxed twice—once by the US and again by their home country. However, double taxation treaties between the US and many countries can help mitigate this:
These treaties often allow foreign sellers to claim a credit for taxes paid to the US when filing taxes in their home country.
To take advantage of this, foreign sellers must file a US tax return and report the FIRPTA withholding.
Avoiding Double Taxation
To avoid double taxation, foreign sellers should file a US tax return (Form 1040NR) and apply for any available tax credits in their home country. This ensures that they only pay the amount owed after FIRPTA withholding and not more.
Final Thoughts on FIRPTA Compliance
Understanding FIRPTA is crucial for foreign investors in the US real estate market. FIRPTA withholding serves as a safeguard for the IRS but can be navigated smoothly with proper filing and compliance.
Sellers must ensure they file the necessary IRS forms to report capital gains and potentially claim a refund. Buyers, on the other hand, must understand their responsibility to withhold and remit the correct amount to the IRS to avoid penalties.
For foreign sellers and buyers alike, navigating FIRPTA withholding requires attention to detail, but with the right information, it can be managed effectively to protect both parties in the transaction.
1. What is FIRPTA withholding and how does it work?
FIRPTA requires the buyer to withhold a percentage of the sales price when purchasing US real property from a foreign seller. The withholding amount is then remitted to the IRS as a prepayment of the seller’s potential tax liability.
2. Who is responsible for FIRPTA withholding?
The buyer (also known as the withholding agent) is responsible for withholding the required percentage from the foreign seller and submitting it to the IRS.
3. How do I claim a FIRPTA refund?
To claim a FIRPTA refund, foreign sellers must file a US tax return (Form 1040NR) with the IRS, attach Form 8288-A for proof of withholding, and submit documentation of the sale and actual tax liability.
4. Can FIRPTA withholding be reduced?
Yes, FIRPTA withholding can be reduced if the seller files Form 8288-B to apply for a withholding certificate before or at the time of the sale. The withholding amount may be lowered based on the estimated tax liability.
5. What is the FIRPTA withholding rate for foreign sellers?
The standard withholding rate is 15% of the gross sales price. However, for sales between $300,001 and $1,000,000, the rate is reduced to 10% if the buyer intends to use the property as their primary residence. No withholding is required for properties under $300,000 used as a personal residence.
