FIRPTA stands for Foreign Investment in Real Property Tax Act. It is the Federal law governing the taxation and withholding when foreign persons sell US real estate.
Because the IRS cannot easily force foreign investors to file U.S. tax returns, FIRPTA built in a mechanism to ensure that the government gets its due: the buyer of the property is required to withhold a set percentage of the gross proceeds from the transaction.
– 10% when the price is > 300 000 $ up to 1 000 000 $
– 10% for homes < 300 000 $ if the home is not used as their residence
– 15% of the gross sales price if the price is > 1 000 000 $
– If the total sale is more than $1,000,000 OR the property is not being acquired as a residence, the buyer is required to withhold 15% of the gross sales price.
Failure to withhold can make the buyer liable for the tax due on the transaction
FIRPTA also stipulates that the amount withheld should not exceed the seller’s maximum tax liability. However, this provision is not automatic. Taxpayers must apply for withholding certificates in order to prove that this is the case, by filing the Form 8288-B.
In addition to filing Form 8288-B, the seller must also inform the buyer in writing that he has applied for the certificate no later than the transfer day. If the IRS agrees with the calculations, it will issue a certificate that confirms the new amount.
For most foreign individuals, it is wise to hire a U.S. tax professional with experience in FIRPTA transactions to assist with this process