Can You Avoid FIRPTA?

“Can You Avoid FIRPTA?”

If you're a foreign investor dealing with U.S. real estate, or you represent someone in the middle of a FIRPTA transaction then you've probably heard of FIRPTA, the Foreign Investment in Real Property Tax Act of 1980. FIRPTA ensures that foreign investors pay U.S. taxes when they sell or dispose of U.S. real estate. Naturally, the big question is: Can you avoid FIRPTA? While you can't entirely sidestep FIRPTA, there are ways to manage and potentially reduce its impact. There are exceptions and exemptions to FIRPTA if someone understands the process well enough. Below are just a few options but there are more so it would be wise for one to work with the IRS or a trusted firm.

FIRPTA 101: A Quick Recap Of FIRPTA

Before we delve into the exceptions, let’s quickly recap what FIRPTA is all about. FIRPTA was enacted in 1980 to ensure that foreign investors pay taxes on gains from the sale of U.S. real property. Under FIRPTA, the buyer of the property must withhold up to 15% of the sales price and remit it to the IRS.

Exception 1: Personal Residence Exemption

One of the most significant exceptions to FIRPTA applies when the property sold is a personal residence. Many times, if the buyer plans to use the property as their personal residence and the sales price is $300,000 or less, the withholding requirement is waived. Here’s how it works:

  • Buyer Certification: The buyer must certify that they intend to use the property as their residence for at least 50% of the time they occupy it during the first two years after the sale.
  • Sales Price Limit: This exemption only applies if the sales price does not exceed $300,000.

This exception aims to make it easier for foreign sellers to sell properties to buyers looking for a home, not just an investment. However, it is important to note that just because a property is being sold for less than $300,000 does not guarantee an exemption from FIRPTA as other factors may change the final decision of the IRS. It is helpful to see advice from an experienced FIRPTA expert or firm.

Exception 2: Withholding Certificate

Another way to bypass the FIRPTA withholding is by obtaining a Withholding Certificate from the IRS. Here’s what you need to know:

  • A FIRPTA withholding certificate is a document from the IRS that can lower or remove the required tax withholding when a foreign person sells U.S. real estate.
  • If the IRS approves, they’ll issue a certificate showing the correct amount to withhold, which the seller can give to the buyer to adjust the withholding. Since this process can take a few weeks, it's important to apply early. This process can be beneficial, but it requires advance planning and paperwork, so it’s best to start early!
  • The IRS used to guarantee a 90-day response to a withholding certificate application, but since Covid-19 the IRS has been backed up and no longer offers the 90-day guarantee. This means there is no promise of a rapid response from the organization.
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Exception 3: Affidavit Of Non-Foreign Status

FIRPTA only applies to foreign sellers of U.S. real estate. If you can prove that you are not a foreign seller, you can be exempt from FIRPTA withholding. This means that if you can show documentation confirming your U.S. citizenship or residency status, the FIRPTA withholding requirement won't apply to your property sale.

It is best to have the person claiming they are not considered a Foreign Seller to sign an Affidavit of Non-Foreign Status. This Affidavit is a legal document that holds the person claiming to not be a foreign seller responsible for the consequences of perjury should they be caught lying. This lifts those consequences off the shoulders of the buyer, and the Real Estate Professionals representing them.

FIRPTA also does not apply to Resident Aliens. Which means if a foreign person has a valid Green Card or can pass the Substantial Presence Test then they too can be exempt from FIRPTA.

Last Thing to Mention…

Understanding FIRPTA and its exceptions can feel like navigating a labyrinth, but with the right knowledge and professional guidance, it’s entirely manageable. Here are a few tips to keep in mind:

  • Consult a Professional: Always work with a tax advisor or real estate attorney familiar with FIRPTA to ensure compliance and explore all available exceptions. FIRPTA Solutions is here to help. With Multilingual processors on staff our firm will help you
    • Submit Remittance Forms
    • Apply for withholding certificates.
    • Apply for tax ID numbers.
    • Penalty Abatement
    • Foreign tax returns
    • Manage difficult or complicated cases.
    • Resolve old FIRPTA files.
    • Aid clients in getting refunds.
    • And so much more!
  • Stay Informed: Tax laws and treaties can change, so stay updated on the latest regulations that might have an impact on your transaction.
Understand FIRPTA Withholding Exceptions

By understanding these exceptions, foreign investors and Real Estate Pros can tackle the FIRPTA landscape with greater confidence and potentially save a significant amount on taxes.

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