If you’ve recently purchased a home from a foreign person, you might have to withhold taxes from your disposition. Sometimes, homeowners are exempt from these requirements, so it’s important to learn whether or not you are.
The Foreign Investment in Real Estate Property Tax Act (FIRPTA) requires Americans who have purchased a property from foreign persons to withhold a certain amount of the disposition and report it to the IRS. Some exemptions exist for Americans who plan to live on the property for a significant period of time. There are also exceptions in cases where a seller certifies they are a non-foreign person or gain zero value from the transaction, among others. Understanding FIRPTA requirements and exemptions is important, as failure to report withholding tax to the IRS can result in steep financial penalties.
Our tax CPAs are here to help Americans understand their FIRPTA withholding tax liability and claim exemptions when possible. To learn more about the tax accountants at US Tax Help, call us today at (541) 362-9127.
How Does FIRPTA Affect International Real Estate Transactions?
If you plan on buying a home or other property from a foreign person in the United States, you should learn about Foreign Investment in Real Estate Property Tax Act. FIRPTA can affect your international real estate transaction more profoundly than you may have anticipated.
FIRPTA dictates that Americans buying property from foreign real estate investors or corporations must withhold 15% of the disposition amount. FIRPTA affects American corporations as well, which must withhold an amount equal to 15% of the amount distributed to a foreign person.
Generally speaking, there are two IRS forms you need to use when reporting FIRPTA withholding taxes. These forms are IRS Form 8288 and 8288-A. Both forms are due about 20 days after the date of transfer. Generally, Americans subject to FIRPTA withholding taxes can get a refund the following tax year.
Are There FIRPTA Withholding Exemptions for International Real Estate Transactions?
The IRS provides various exemptions for FIRPTA withholding requirements. That being said, only a few of the exemptions specifically apply to U.S. individuals purchasing a property from foreign persons or corporations. If you plan to buy a home from a foreign person and are concerned about how FIRPTA may impact you, there are several exemptions you should be aware of.
Home Value
If you purchase a home from a foreign person or corporation in the United States, and the total cost of the home is less than $300,000, FIRPTA will not apply to you. That being said, there is specific criteria you must meet to qualify for this FIRPTA withholding tax exemption. Generally, you or your family must live in the purchased home for at least one year before another family resides there. For example, suppose you purchase a home from a foreign investor with the intention of rent it to tenants. In that case, you will have to live in that home for some time after purchasing it to qualify for this FIRPTA exemption.
Non-Foreign Seller
Suppose the person you purchase property from provides a certification stating that they are indeed an American citizen or resident and provides the necessary documentation to prove their status. In that case, you will be exempt from FIRPTA withholding taxes. Real estate investors can provide similar information to prove that they are part of a domestic company.
Qualified Substitute
If a transferor can give a qualified substitute a certification asserting that they are not a foreign person, and that person then handles the closing transaction, you may be exempt from FIRPTA withholding taxes. It’s important to consult an experienced tax accountant to learn who exactly can be a qualified substitute and how that may affect you.
Withholding Certificate
If you plan to purchase property from a foreign person or corporation and want to avoid FIRPTA withholding taxes, you can apply for a withholding certificate from the IRS. The IRS only grants withholding certificates in certain situations, and applying for a certificate does not guarantee you will be granted one. Consult a skilled tax accountant to learn more about the criteria for receiving a withholding certificate from the IRS.
Non-Recognition Provision
Under the IRS Code, certain gains or losses are not recognized. In some cases, an IRS non-recognition provision can apply to your recent property purchase from a foreign person, exempting you from FIRPTA withholding taxes. That being said, the transferor is responsible for sending you written notice of an exemption due to a non-recognition provision. If you don’t receive written notice from a transferor, you will not be exempt from FIRPTA withholding taxes.
Zero Financial Gain on Transfer
When a foreign transferor realizes zero financial gain on the transfer U.S. real property, you will be exempt from FIRPTA withholding taxes. While this is not necessarily common, it allows U.S. persons to avoid FIRPTA withholding taxes when purchasing a property from foreign persons or corporations.
Rare FIRPTA Withholding Exemptions for International Real Estate Transactions
There are additional exceptions to FIRPTA withholding taxes that do not commonly apply to individuals purchasing a property from foreign persons in the United States. Nevertheless, they exist and, should they apply to your situation, may be helpful to know.
If you purchase publicly traded stock in a company owned by a foreign person or corporation, you don’t have to pay FIRPTA withholding taxes. This rule also applies to partnerships and trusts that purchase publicly traded stock in foreign corporations. There is also an exemption for situations where a company sells you interest that is not publicly traded stock but is also not real U.S. property. For this exemption, it’s the seller’s responsibility to inform you whether or not your recent purchase exempts you from FIRPTA withholding taxes.
There’s also an exemption for property bought by the government, which doesn’t apply to individual Americans purchasing property owned by foreign persons or corporations.
If the grantor in your international real estate transaction realizes a return on an option and not the real estate itself, you won’t have to withhold FIRPTA taxes for the property. However, you will have to withhold money made on the option. This can be complicated, so it’s important to consult a skilled tax CPA for clarification.
Reporting FIRPTA withholding taxes can be a challenging task. It’s important that you have a skilled tax accountant by your side during your international real estate transactions, as failure to withhold FIRPTA taxes and report them to the IRS can result in substantial financial penalties.
Call Our Tax CPAs to Learn More About FIRPTA Withholding Exemptions
If you’ve recently engaged in international real estate transactions and want to learn if you are exempt from FIRPTA withholding taxes, reach out to our professionals. To learn more about the tax accountants at US Tax Help, call today at (541) 362-9127.
As a tax professional well-versed in international real estate transactions and the Foreign Investment in Real Estate Property Tax Act (FIRPTA), I've gained comprehensive knowledge and expertise in navigating the intricate landscape of tax obligations, exemptions, and implications for individuals involved in such transactions.
My understanding of FIRPTA stems from its fundamental requirement for Americans purchasing properties from foreign individuals or entities. This act necessitates withholding a certain percentage (typically 15%) of the disposition amount and reporting it to the IRS. Failure to comply with FIRPTA can lead to severe financial penalties, making it crucial for individuals to understand their obligations and potential exemptions.
Regarding the concepts covered in the article about FIRPTA and international real estate transactions, here's an elaboration:
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Foreign Investment in Real Estate Property Tax Act (FIRPTA): This legislation mandates that American buyers purchasing properties from foreign individuals or corporations withhold a specific amount (usually 15%) of the disposition and report it to the IRS.
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FIRPTA Requirements: Americans purchasing property from foreign sellers must use IRS Forms 8288 and 8288-A to report and withhold taxes. These forms are typically due about 20 days after the property's transfer.
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Exemptions under FIRPTA: a. Home Value Exemption: Properties purchased for less than $300,000 may be exempt if certain criteria are met, including residing in the purchased property for a specific period. b. Non-Foreign Seller: Exemption applies if the seller certifies their U.S. citizenship or residency. c. Qualified Substitute: Exemption can occur if a qualified substitute receives certification from the transferor stating they are not a foreign person. d. Withholding Certificate: Applicants can request a withholding certificate from the IRS to avoid withholding taxes in specific situations. e. Non-Recognition Provision: Certain gains or losses may not be recognized, offering exemptions from FIRPTA taxes. f. Zero Financial Gain on Transfer: Exemption applies when the transferor gains zero financial benefit from the property transfer.
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Rare Exemptions: These include scenarios involving publicly traded stock purchases, property acquisition by the government, or transactions where the grantor realizes returns on options rather than the property itself.
Understanding these concepts is crucial for anyone involved in international real estate transactions to ensure compliance with FIRPTA regulations and take advantage of available exemptions. Seeking guidance from experienced tax accountants or CPAs specializing in international real estate transactions, like those at US Tax Help, can prevent potential penalties and ensure a smoother transaction process.
