What is FIRPTA and How Do I Avoid It?

When the Foreign Investment in Real Property Tax Act (FIRPTA) took effect in 1984, it exposed foreign sellers to capital gains tax on appreciated real property. Today, in states like Florida, FIRPTA transactions are common.

But what exactly is it, and what does it mean for you?

The Basics

Passed in 1980, FIRPTA imposes income tax on foreign persons in the disposition appreciated real property located in the United States. Such transactions include a sale or exchange, liquidation, redemption, gift, transfer, etc.

When dealing with a property transaction involving a foreign national, FIRPTA is the first thing real estate professionals and investors need to consider.

Who is subject to FIRPTA?

Non-U.S. taxpayers who sell their U.S. real estate holdings are subject to FIRPTA withholding. This includes nonresident alien individuals, foreign corporations, partnerships, trusts and estates. Expatriates are also subject to FIRPTA if the sale of their property occurs post-expatriation. There are also special rules for domestic LLCs with foreign owners.

When it comes to FIRPTA, every seller is considered foreign unless they can prove otherwise. That’s why it’s a common and prudent practice for real estate sale agreements to include an affidavit under penalty of perjury stating that the seller is not a non-resident alien for purposes of U.S. income taxation.

Although not subject to FIRPTA, buyers and closing agents are responsible for withholding it and may be held liable for it by the IRS. It is imperative that FIRPTA is addressed before the deal is closed in order to avoid any potential issues.

Navigating FIRPTA Withholding

If a property sale is identified as involving a foreign national or entity, there are several considerations to make in regards to FIRPTA withholding. Current guidelines establish different withholding rates depending on the sales price and the use of the property by the buyer:

• If the amount realized is less than $300,000, FIRPTA may not be applicable if certain conditions (described in the next section) are met.
• If the amount realized is $300,000 to $1 million, FIRPTA is withheld at a rate of 10% of the amount realized.
• If the amount realized is more than $1 million, FIRPTA is withheld at a rate of 15% of the amount realized.

The realized amount includes cash, fair market value of non-cash consideration (such as another property) and debt released during the transaction. FIRPTA withholding must be set aside and submitted to the U.S. Treasury Department within 20 days of the closing.

FIRPTA withholding is reported on IRS Form 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests). The seller should also receive form 8288-A.

How to Avoid FIRPTA

If the seller is a U.S. person, there is no need to be concerned with FIRPTA as it only applies to foreigners. However, some green card holders may be considered foreign by the IRS. Additionally, some foreigners may have valid Social Security numbers.

There is also no FIRPTA withholding required if the amount realized on the sale is less than $300,000 and the property will be used mostly as a home by the buyer. To meet this exception, the buyer must certify that they intend to use the property as their residence for more than 50% of the days the property is used by any person during the first 24 months after the sale.

The only other way to avoid FIRPTA is via a withholding certificate. If FIRPTA withholding exceeds the maximum tax liability realized on the sale of the real property, sellers can appeal to the IRS for a lower withholding amount. For example, if the sale of the property results in a loss to the non-resident individual, FIRPTA can be avoided all together.

The application for withholding certificate is complex and usually done using IRS Form 8288-B (Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests).

Several attachments and certifications need to be included with the form 8288-B, and the certificate has to be filed before or on the date of the closing, so it’s imperative to start preparing the required information way ahead of the planned date to close the deal. The IRS has 120 days to authorize a lower withholding. FIRPTA withholding should be held in escrow while awaiting the IRS decision.

Stay Cognizant of FIRPTA

Any real estate transaction involving a foreign national needs to trigger FIRPTA considerations. Real estate agents operating in markets with heavy foreign investment should be well-schooled in the process of recognizing FIRPTA triggers and authorizing contracts on behalf of both buyers and sellers.

For more information, it’s best to work with a skilled international tax professional who understands the nuances of FIRPTA.