Foreign Investor Real Property Taxes Act (“FIRPTA”)
- The sale or transfer of a US vacation or investment home by a non-resident (“transferor” or Seller) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
- This is how the USA captures unpaid Income Tax on Rental profits or Capital Gains Tax on Property and land sales.
- The buyer of the property, via their agents and settlement officers at the Title company handling the “closing”, is required to withhold 15 percent of the gross sales price
- This is called “withholding tax”. (i.e. $45,000 on a property with a sales price of $300,000).
- The “transferee” (buyer) is the “withholding agent”. If you are the buyer you must find out if the “transferor” (seller) is a foreign person. If they are and the Title Company fail to withhold, you may be held liable for the tax. Then, ensure a smooth transition on your eventual sale, you must ensure that you retain proof that FIRPTA was satisfied on your original purchase.
- One exception to FIRPTA withholding is where the “transferee” (buyer) purchases real estate for use as his permanent home and the purchase price is not more than $300,000.
- If you purchase property from a non-resident seller and an exception to FIRPTA withholding does not apply then you must ensure that FIRPTA is satisfied at the closing.
- Check your HUD/settlement statement prior to closing where you should see 15% of the sales price withheld on the seller’s side of the settlement statement.
- Request a copy of the withholding certificate from the closing agent and, if withholding was calculated, request a copy of forms 8288, 8288-A, (and front and back of the cancelled check which was raised to pay the withholding) and retain all of these closing documents. The withheld amount is required to be forwarded to the IRS, by the Closing Agent, within 20 days of the date of closing. These funds are held until the IRS is satisfied that all taxes due by the non-resident seller are paid.
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