Use our free US tax calculator to calculate how much FIRPTA taxes you need to pay the IRS
Foreign Investment In Real Property Tax Act (FIRPTA) 1980 requires the purchaser’s legal attorney to withhold 15% as advanced taxation of the seller. The 15% is based on the gross proceeds of the sale, less legal costs. Please note that mortgages/loans are not considered; the 15% FIRPTA withholding taxes calculation ignores liabilities.
How much FIRPTA withholding taxes you pay to The Internal Revenue Services depends on how much you sell the real estate property for.
Please check the numbers you calculate against the tax liability shown on form 8288 by the buyer’s attorney. You will want to ensure that the tax paid to the IRS is correct and minimised where possible.
Foreign Investment In Real Property Tax Act taxes payable to The Internal Revenue Service (IRS)
We spoke about FIRPTA and its interaction with Capital Gains Tax. We also discussed how FIRPTA can be avoided using a 1031 exchange contract if you use the sales proceeds to purchase a replacement real estate property investment.
We are going to focus on Foreign Investment In Real Property Tax Act (FIRPTA) 1980 where the taxes will be paid to the IRS by a foreigner that sells real estate property in the United States.
How much is FIRPTA withholding?
FIRPTA is 15% of the gross value, less any attorney fees less realtor fees payable.
– $400,000 is the property’s gross sales value
– $15,000 is the realtor’s fees
– $5,000 is the attorney fee for selling the property.
– $380,000 is the figure used for the 15% FIRPTA tax calculation.
Please note that the property may be subject to a mortgage to be paid back upon the sale. In this example, the property has a mortgage loan of $350,000. The foreign property owner has $30,000 left ($380,000 of the sales proceeds after fees less $350,000 mortgage).
FIRPTA tax withholding payable to the IRS is $57,000 ($380,000 X 15% FIRPTA).
In this example, we can see that the person does not have enough money from the sale of the property to pay the FIRPTA taxes. The foreign property owner would have to contribute money from their savings to pay the withholding tax.
IRS form Foreign Investment In Real Property Tax Act 8288
The buyer’s attorney of the real estate property is responsible for deducting the 15% tax withholding from the sale. The responsibility is on the purchaser to ensure that the withholding FIRPTA taxes are duly paid to the Internal Revenue Service, attaching IRS Form 8288 within 20 days of the property transfer. The IRS may apply penaltiesfor failing to make the appropriate disclosures and payments for FIRPTA.
Under IRS code section 7202, you may be subject to a penalty of up to $10,000 for failing to collect and pay over the tax liability.
The form 8228 FIRPTA tax withholding is sent to
Ogden Service Center
P.O. Box 409101
Ogden, UT 84409
If you are the seller of a US real estate property as a foreigner, you need to check the completed form 8288 when it is about to be submitted to the IRS. You will want to know that Form 8288 contains the right numbers and the right calculations have been made.
FIRPTA witholding reduced rate of 10% and exemption
A 10% FIRPTA rule applies whereby the
– property which the transferee acquires for use by the transferee as a residence, and
– amount realized for the property is $1 million or less.
If the US. real property is to be used as a residence and the amount realized is $300,000 or less; no withholding is required.
No FIRPTA withholding is required if you receive a certification of non-foreign status from the seller. This certificate is signed under penalties of perjury. The certificate states that the seller is not a foreign person. A certification of non-foreign status includes a valid Form W-9 submitted by the transferor.
FIRPTA exemption using form W-8BEN
No FIRPTA tax withholding is required where the seller provides a certification using Form W-8BEN or W-8BEN-E. This is to state that the seller is not subject to tax on any gain from the transfer pursuant to an income tax treaty.
Claim back Foreign Investment In Real Property Tax Act taxes paid to the IRS
Anyone required to pay withholding taxes to the IRS may claim some, if not all, of it back. The FIRPTA taxes paid will act as a tax credit on the 1040 tax return filed with the IRS. Foreigners submitting a 1040 tax return to the IRS must calculate the Capital Gains Tax liability. A refund may be issued if the withholding taxes (FIRPTA) is more than the Capital Gains Tax payable.
