FIRPTA: The Basics for Foreign Sellers and Real Estate Agents

Florida is the land of sunshine and Mickey Mouse, and these two treasures draw individuals from our northern borders and others from all over the world. In some of my recent real estate closings, many foreign sellers are surprised to hear that they are subject to the Foreign Investment in Real Property Tax Act (“FIRPTA”).

Prior to 1980, a foreign seller was not taxed on the gains realized from the sale of real property which had situs in the United States.  On June 18, 1980, foreign sellers became subject to the capital gains tax on appreciated real property.  The FIRPTA withholding requirements became effective after December 31, 1984 as a tool to ensure payment to the Treasury Department when a foreign seller conveys United States real property.

The Withholding Requirement

Section 1445 of the Internal Revenue Code (the “Code”) generally requires a buyer to withhold fifteen percent of the amount realized when the seller of the real property is a foreign person.  A foreign person is a nonresident alien individual, foreign corporation (which has not made the 897(i) election), foreign partnership, foreign trust, or foreign estate.  It generally does not include a resident alien if that resident alien is subject to United States income tax as a United States person (if they pay United States Income Tax on their worldwide income).  FIRPTA, surprisingly, can also affect a United States citizen if the individual is an expatriate prior to selling their United States real property.  In addition, the amount realized includes the sum of cash paid, fair market value of any real property transferred, and the assumption of any debt incurred as consideration in the transaction.

The fifteen percent of the amount realized has no correlation to the possible tax associated with the sale of the real property.  It has been established to ensure that the Treasury will receive the proper tax due upon the sale of the property.

The Exceptions

If a seller is not considered a foreign person, there is no FIRPTA withholding.  The seller must simply sign an affidavit stating, under penalties of perjury, that the seller is not a foreign person.  Please note that a green card alone may not be sufficient evidence to disregard FIRPTA.  It must be determined that at the time of closing the foreign person reports and pays United States Income Tax on their worldwide income.

There is a second exception for a foreign person who is selling real property for $300,000.00 or less.  In addition to the sales price being equal to or less than $300,000.00, the buyer must sign an affidavit that the buyer intends to use the property as their residence. To qualify, the buyer (or family members) must have definite plans to reside at the property for at least fifty percent of the days that the property is used by any person during the first two twelve month periods following the sale.

The final exception, or alternative, is a withholding certificate.  Based on a technical reading of the Code, the total amount of withholding under FIRPTA cannot exceed the maximum tax liability realized on the sale of the real property.  If the gain realized on the sale of the real property is less than the fifteen percent withholding or if there is a loss on the sale of the property, a seller can obtain a withholding certificate – IRS Form 8288-B.  The IRS generally reviews and responds within 120 days after the form is submitted and can authorize a withholding less than the fifteen percent.  If the IRS has not authorized the lower amount prior to closing, the closing agent should withhold the fifteen percent of the amount realized and then submit the lesser amount within twenty days of receiving the authorization from the IRS.  The difference from the fifteen percent and the amount shown on the withholding certificate can be submitted directly to the seller.

The Procedure and Penalties

A foreign seller must first provide proof of FIRPTA compliance when they originally purchased the property.  This is usually evidenced by a non-foreign certificate when the property was purchased.  In addition to the requirements under FIRPTA, a foreign person must file a United States tax return – IRS Form 1040 or IRS Form 1040NR.  If the fifteen percent withholding is required under FIRPTA, IRS forms 8288 and 8288-A must be submitted to the IRS within twenty days after the real estate closing.  As discussed above, the closing agent can submit the lesser amount to the Treasury if a withholding certificate is used and approved by the IRS.  This lesser amount must be submitted within twenty days of receipt of the returned withholding certificate.

Although this is a withholding imposed on the seller and the seller is required to report the sale and pay the proper taxes, the buyer is also responsible for any non-withholding, when withholding is required.  Therefore, the buyer must ensure that if the seller is a foreign person, the fifteen percent is withheld or a withholding certificate is approved.  If this is not done, there can be civil and criminal penalties imposed under Federal law.

Conclusion

Foreign sellers and the real estate agents for foreign sellers need to be informed and prepared for FIRPTA prior to listing the real property for sale. In addition, buyers need to be aware of FIRPTA if the seller is a foreign person. It is advisable that a foreign person seeks out both legal counsel and the counsel of a certified public accountant prior to the listing real property to ensure they will be FIRPTA compliant.