FIRPTA tax withholding for foreign nationals

Foreign nationals can easily buy and sell real estate within the U.S. - however they also are subject to a law that states that taxes have to be paid on capital gains realized when selling real estate. While the tax rate may be individually different and can be checked for with a local tax professional or C.P.A. one thing stays the same for all international sellers: the so called FIRPTA law (Foreign Investment Real Property Tax Act). This law makes sure that if one or more individuals (not domestic corporations, LLC's etc.) sell real estate in the U.S.A. a 15% tax withholding (as of 2018) of the sales price will be triggered.

To ensure that this tax amount definitely makes its way to the Internal Revenue Service, the buyer is made responsible by the IRS to withhold this percentage of the sales price. He is liable with the transferred property later on in case the tax has not been withheld.

The title company as withholding agent has the task to submit the 15% to the IRS within 20 days after closing. When this is done, the seller will have to do a tax return at the end of the year with which the IRS will determine what the actual tax debt is. In most of the cases the 15% is more than what the tax debt will be so after the IRS has reviewed and approved the return they will send the difference between actual tax debt and withheld amount back to the seller and the file is closed.

The Withholding Certificate and the tax ID number

In case the seller wants to prevent the title company from sending the funds into the IRS he will have to contact his tax professional or C.P.A. at the time the sales contract is signed. The tax professional will apply for a so called withholding certificate with the IRS, latest on the day of closing.

Basically this is an early tax return. If this withholding certificate is applied for in time, the title company is not obliged to send the funds to the IRS within the 20 day period. They wait for the documents to be reviewed and approved and will receive a confirmation from the IRS how to handle the funds meaning which amount has to be sent to the IRS and how much will go back to the seller.

To properly document and track this process at the IRS both seller and buyer need to have a tax ID number in the U.S. Should both parties be foreign nationals then both will need to apply for a tax ID number. The most time consuming part is the provision of a certified passport copy to the local tax professional.

This passport certification is exclusively to be done by the authority that has initially issued the passport. The certified copy has to be sent as an original. If this document missing, then no tax ID number can be applied for and there will be issues during the transaction and when it comes to recording and tracking the payment at the IRS.

There are exemptions within the FIRPTA law, e.g. if the contract price is $300,000 or less and the buyer confirms in writing that he will use the property for at least 50% of the year within the next 2 years. Also if a property is owned and sold by a domestic corporation it is exempt.

This information only serves as a general overview about FIRPTA and is not to be considered tax advice. Every international/foreign buyer or seller should consult their tax professional before entering into a sales contract to verify details and make sure they understand individual differences. We are happy to get you in touch with a local C.P.A.