FIRPTA WITHHOLDING

ATTENTION BUYERS

You may be impacted by Foreign Investment in Real Property Tax Act and Withholding Requirements (FIRPTA) whether you are the buyer or seller of US real estate.  FIRPTA requires any person acquiring real property to collect a withholding tax equal to 10% of the gross sales price from a foreign seller and forward those funds to the IRS within 20 days of the closing. To properly forward those funds the buyer and seller must have or obtain a United States taxpayer identification number. Additionally, if the seller determines that the actual tax owed is less than this 10% amount to be withheld, the seller can submit a request to the US IRS (Form 8288) that only a lesser amount be withheld.  IRS application for reduction of withholding must be filed before the transaction closing.

Without IRS permission, the 10% or new 15% rules of the Sales Price, must be withheld regardless of the amount of tax due.  These amounts must be paid over to the IRS within 20 days of the transfer, unless a timely filed application to reduce or eliminate withholding tax has been filed. If the funds are not paid over timely there a hefty penalties assessed.

An Escrow/trust account holds the 10% or new 15% funds until the trustee receive an IRS certificate of Determination Letter.

If the application is filed the 10%  or new rules 15% withheld tax is still withheld at the closing and is deposited in a trust account until a determination letter is received. The application suspends the payment of tax until a certificate is received; normally takes 2 to 6 months to receive a determination letter.

For all Closinig Taxpayer must have a US Idintification

The FIRPTA tax withheld does not eliminate the sellers’ obligation to file a US tax return.  The withholding agent must report the details of the transaction on an IRS forms.

The Buyerand Seller is required to have or obtain a US Identification number (ITIN) and our office can assist in the application process.

Buyers and sellers alike should retain both their initial purchase and subsequent closing documents as well receipts for any improvements or additions to the property.  Additionally, all tax returns filed relating to properties or other investments here in the United States should be maintained to determine the current profit/loss to calculate tax due.



(See checklist)

(Starting February 16, 2016, settlement agents will need to start holding back more proceeds from the sale of property by foreign nationals caused by changes to the Foreign Investment in Real Property Tax Act ("FIRPTA"). The changes were part of the yearend tax extension legislation signed into law by President Obama on December 18, 2015. If you want a reference, it is H. R. 2029, now known as Public Law 114-113. See Section 324 for text of changes.

FIRPTA is a tax law passed in 1981 that requires foreign persons to pay U.S. income tax on the gains they make from selling U.S. real estate. The duty is on the U.S. national buyer (and not the settlement agent) to deduct and withhold a portion of the sales price and report the sale to the IRS. Buyers can withhold less than the statutory amount if they obtain a determination of the specific amount of tax owed by the foreign national using IRS Form 8288-B. In most cases, the settlement agent is the party that actually remits the funds to the IRS, but the buyer is held legally responsible. Additionally, until the tax is paid in full, the government obtains a security interest in the real property.

The old 10% rate will still apply for those transactions in which the property is to be used by the Transferee as a residence, provided the amount realized (generally the sales price) does not exceed $1,000,000, and the existing $300,000 “exemption” remains unaffected. New, If the amount realized exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the Transferee. So here are your new guidelines:

• If the amount realized (generally the sales price) is $300,000 or less, AND the property will be used by the Transferee as a residence (as provided for in the current regulations), no sums need be withheld or remitted.
• If the amount realized exceeds $300,000 but does not exceed $1,000,000, AND the property will be used by the Transferee as a residence (there are no regulations that specifically address these changes but many are assuming you can follow the current regulations for the $300,000 exemption), then the withholding rate is 10% on the full amount realized.
• If the amount realized exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the Transferee.)

See also FIRPTA CHECKLIST

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If you have any questions call Gidney & Co, CPA at (305)866-6266.