In this article & video we are going to answer the question, what is FIRPTA. Basically, FIRPTA stands for Foreign Investment Real Property Tax. It is designed for people who invest in real estate in the United States. The reason FIRPTA exists is so the IRS can track the revenue earned by those purchasing U.S. real estate while taxing any gains. The IRS does not want people making money and running away with it without paying their fair share of their federal taxes.
FIRPTA EASILY EXPLAINED
To sum it up, the purpose of FIRPTA is to withhold the funds from these types of foreign investors who may be making money in this country off of real estate without paying their fair share of tax.
HOW FIRPTA WORKS
When a foreign investor sells you a piece of property, the buyer has the responsibility to do the withholding. This is done through the title company. Most title companies hire a professional to help calculate the tax and to prepare an exemption certificate so the exact amount of tax is known.
THE CURRENT WITHHOLDING RATE
Currently, the withholding amount is 15%, which is rather high, of the total sales price. If there is no gain, an exemption certificate will hold the funds until the IRS accepts or approves the certificate.
If the IRS does not accept the certificate, the funds have to be sent to the IRS. Once the final tax return is prepared for that individual, they will receive their refund. If there is no tax due and an exemption certificate is requested, the money gets returned to the individual or the foreign investor.
So remember, the buyer may be held liable if the taxes are not properly done at the time of the sale of the property.
ONE LAST THING TO REMEMBER – ITIN
If you are selling property or if you are renting property in the United States and you are a foreign investor, be sure you have an ITIN. An ITIN is an Individual Tax Payer Number. Having an ITIN will make the whole process both easier and faster.
Also, it’s very important to note that you are required to file a tax return on on all rental property every year and you will also be required to file a tax return after you sell any property.
If you have any questions, call us at 407-382-6658.