FIRPTA

What is FIRPTA & Why is a FIRPTA Affidavit Important?

The acronym FIRPTA stands for Foreign Investment in Real Property Tax Act. The 1980 act by the Internal Revenue Service (IRS) ensures that foreign taxpayers pay income tax on the sale of U.S. property. It enables the U.S. government to receive its share of taxes from real estate sales.

Though a foreign seller owes the FIRPTA tax, it is the buyer who is responsible for setting aside the portion from the proceeds of the sale.

When you purchase property from a foreign seller, you need to send the funds to the IRS within 20 days of the closing. These two forms should accompany the account:

• Form 8288: It is an IRS form for the U.S. Withholding Tax Returns for Dispositions. The dispositions held by Foreign Persons of U.S. Real Property Interests.

• Form 8288-A: It is a Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

What Is a FIRPTA Affidavit?

Also known as an Affidavit of Non-Foreign Status, it is an IRS form a seller uses to certify under oath that he/she isn't a foreign citizen.

The form includes important information such as the name of the seller, U.S. taxpayer identification number as well as the home address.

This document is a part of the seller's opening package. The seller swears under penalty of perjury that he/she “is not a non-resident alien for purposes of United States income taxation.”

Without the FIRPTA affidavit form, a buyer cannot know with certainty if the person selling them a U.S. property is a foreign person or not. It protects the buyer if withholding is deemed not necessary.

If a seller is unable to complete the FIRPTA affidavit, he/she may be subjected to a withholding of up to 15%. Thus, it becomes crucial for both parties to determine if withholding applies to the sale of the property.

FIRPTA Penalties:

If a buyer doesn't withhold on a foreign seller when required, he/she can be severely penalized.

FIRPTA Withholding:

The amount of FIRPTA tax to be withheld is determined by two factors:

• Total proceeds from the sale
• If the buyer plans to reside in the purchased property

• FIRPTA withholding tax may be waived if the purchase price is less than $300,000 and you or a family member plans to live in the property for at least 50% of the time for the first 24 months of ownership. This exemption is not automatic, and the buyer must sign an affidavit of their residency intentions.
• If the actual taxes due are less than the withholding amount (either 10% or 15%), the seller will be eligible to receive a refund for the difference after they file a tax return.
• When the seller provides a FIRPTA affidavit declaring that they are not a foreign person, the FIRPTA tax does not apply to the transaction. All requirements of this affidavit must be met however.

Buyers should be watchful while purchasing real estate property from a foreign seller. Moreover, FIRPTA rules and regulations can be complicated. It is recommended to consult with a Certified Public Accountant (CPA) or real estate attorney to fully comply with the law. The experienced professionals at FIRPTA Solutions can help you with the FIRPTA affidavit, FIRPTA withholding certificate, and ITIN application process.

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