People from all over the world have invested in and continue to invest in U.S. based land, often times for a profit. The IRS needed a better way to “follow” and tax these transactions. So, the Foreign Investment in Real Property Tax Act (FIRTPA) was enacted in 1980 as part of the Revenue Adjustments Act of 1980 to make sure foreign landowners pay taxes on any gains made from the selling of U.S. property. This is also known as FIRTPA Withholding.
The paying of taxes on sold property is not a new or unusual concept as U.S. tax law requires everyone, either domestic or foreign, to pay income taxes on the sale of U.S. property as part of their annual income taxes.
What is a Foreign Land Owner?
A foreign land owner is considered a non-resident alien that owns land yet does not hold a green card nor are they a U.S. citizen, and they do not meet the substantial presence test as outlined by the IRS. This term can also apply to a foreign corporation, partnership, estate or trust that is not incorporated in the U.S.
Understanding FIRTPA as a Real Estate Buyer
Under FIRPTA, if you buy U.S. real estate from a foreigner you might be required to withhold 15% of the amount realized from the sale. What is amount realized? Under normal circumstances the amount realized is considered the purchase price of the property. By the purchaser withholding funds, the IRS can more easily collect the U.S. tax owed on the sale of the property by the foreign seller. It is possible for the buyer to apply to the IRS and request the 15% withholding (10% before 2/17/2016) be reduced to the tax estimated to be due.
Can FIRTPA be Reduced?
It is possible to decrease the FIRTPA withholding by 5% (from 15% to 10%) if the amount realized form the sale is less than $1 million and more than $300k.
FIRTPA withholding can also be eliminated altogether if the foreign seller gets a withholding certificate from the IRS.
Can FIRTPA be Skipped?
It is possible to avoid FIRTPA withholdings when it comes to residential sales under $300K, but the the buyer has to sign an affidavit declaring the property will be occupied 50% of the time or more (during each of the first two 12 month periods following the date of purchase)and the property will be their or a family member’s home of residence.
IRS FORM 8288
When it comes to which form is best for you concerning FIRTPA, you will want IRS Tax Form 8228 – U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests.
Main Sections in IRS Tax Form 8288
• To be completed by the Buyer or Other Transferee to Withhold Under Section 1445(a)
• To be completed by the Entity Subject to the Provisions of Section 1445(e)
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