One of our most asked questions we get from people regarding FIRPTA is what are the FIRPTA exceptions and if they are exempted from FIRPTA. We want our clients to know that FIRPTA is not a tax but a withholding. A withholding is an amount held back used to pay potential taxes. The IRS implements a withholding on foreign sellers to make sure they pay their fair share of taxes. In other words, the IRS will hold the potential tax owed “hostage” until the seller files a tax return to show what they actually owe.
Since we know that the IRS implements a FIRPTA Withholding on foreign sellers, we can use the IRS list of FIRPTA exceptions to decide whether you’re exempted or not. According to the IRS, you’re exempted from FIRPTA withholding if you meet the following:
You (the transferee) acquire the property for use as a residence and the amount realized (sales price) is not more than $300,000. You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant. For this exception, the transferee must be an individual.
The property disposed of is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded corporations.
The disposition is of an interest in a domestic corporation and that corporation furnishes you a certification stating, under penalties of perjury, that the interest is not a U.S. real property interest. In most cases, the corporation can make this certification only if either of the following is true.
During the previous 5 years (or, if shorter, the period the interest was held by its present owner), the corporation was not a USRPHC.
As of the date of disposition, the interest in the corporation is not a U.S. real property interest by reason of section 897(c)(1)(B) of the Code. The certification must be dated not more than 30 days before the date of transfer.
The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor’s name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).
The transferor can give the certification to a qualified substitute. The qualified substitute gives you a statement, under penalties of perjury, that the certification is in the possession of the qualified substitute. For this purpose, a qualified substitute is (a) the person (including any attorney or title company) responsible for closing the transaction, other than the transferor’s agent, and (b) the transferee’s agent.
You receive a withholding certificate from the Internal Revenue Service that excuses withholding.
The transferor gives you a written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the Ogden Service Center, P.O. Box 409101, Ogden, UT 84409.
The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
The property is acquired by the United States, a U.S. state or possession, a political subdivision, or the District of Columbia.
The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale, exchange, or exercise of that option.
The disposition is of an interest in a publicly traded partnership or trust. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded partnerships or trusts.
You are encouraged to use our FIRPTA Exceptions tool to help determine
if you are exempted from FIRPTA Withholding.
Does FIRPTA Apply To Me?