Is Your Real Estate Transaction Subject to FIRPTA Tax Withholding?

Daniel PascaleBy Daniel T. Pascale, Esq.

Offices located in Delray Beach and Coral Gables, FL

What is FIRPTA?

The Foreign Investment in U.S. Real Property Tax Act of 1980 (“FIRPTA”) was enacted to ensure that foreign investors are taxed on the gains from the disposition of their U.S. real property investments.  Pursuant to FIRPTA, a buyer (whether domestic or foreign) purchasing U.S. real property interests from a foreign person must withhold 10 percent of the amount realized from the sale (i.e., the entire purchase price, not just the gain).  FIRPTA applies to both residential and commercial real estate transactions.

In a FIRPTA transaction, the buyer (i.e. the transferee) is considered the withholding agent and has the responsibility to determine whether the seller (i.e. the transferor) is a foreign person; otherwise, if the seller is a foreign person and the appropriate amount is not withheld, the buyer will be held liable for the tax, and any and all penalties.

The IRS defines a foreign person as a nonresident alien individual, a foreign corporation that has not made an election under section 897(i) of the Internal Revenue Code to be treated as a domestic corporation, a foreign partnership, a foreign trust, or a foreign estate.

Are There Exceptions to FIRPTA Tax Withholding Requirements?

Under FIRPTA, buyers are required to withhold 10 percent of the amount realized on the disposition (essentially, the gross proceeds of sale), unless:

(i) The property is acquired by the buyer for use by him or his family member as a residence (definite plans to reside at the property for at least 50% of the year), and the sales price for the property does not exceed $300,000; or

(ii) The buyer is presented with a bona fide withholding certificate from the seller reducing the FIRPTA tax withholding obligation; or

(iii) The seller gives you a certification stating, under penalties of perjury, that the seller is not a foreign person and containing the seller’s name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity); or

(iv) The amount the seller realizes on the transfer of a U.S. real property interest is zero.

FIRPTA Tax Withholding Certificates 

In addition to the above listed exceptions, the amount of withholding may can be adjusted pursuant to a withholding certificate issued by the IRS in advance of the sale.  In certain situations, a seller may apply to the IRS for a withholding certificate before the tax payment is due based upon:

(i) the seller is entitled to non-recognition treatment (i.e. 1031 Tax Deferred Exchange); or

(ii) the 10% withholding payment exceeds the seller’s maximum tax liability or the withholding of the reduced amount would not jeopardize collection of the tax; or

(iii) before the tax withholding payment is due, the buyer and seller enter into an agreement providing security for the tax liability.

When is a FIRPTA Tax Withholding Payment Due to the IRS?

According to the FIRPTA tax regime, a buyer of real estate from a foreign national is required to report the purchase/sale to the IRS vis a vis IRS Forms 8288 and 8288-A, and pay the applicable 10% tax withholding amount by no later than the twentieth day after the sale.

Each real estate transaction is unique.  Whether or not FIRPTA applies is highly dependent upon your unique situation. For a complimentary and confidential consultation with an experienced Florida real estate lawyer, please call our office at: 305-501-2836 or visit us at www.jordanpascale.com.