How to Avoid FIRPTA Withholding - Updated Guide

Florida is one of the hottest markets for foreigners who want to acquire real estate in America. Nonetheless, selling or buying any type of real estate as a non-US citizen is always more complex when you need to deal with FIRPTA.

In this article, we provide you an updated guide with detailed information about FIRPTA, and how to avoid FIRPTA withholding in Florida.

Back to Basics – What is FIRPTA?

FIRPTA is an acronym for Foreign Investment in Real Property Tax Act. It is the Federal law governing the taxation & withholding by foreign persons selling US real estate.

This legislation was passed back in 1980, applying to non-U.S. citizens and foreign entities. Hence, it allows the United States Federal Government to withhold income tax that is owed at the point in time when a property is transferred.

Dealing with FIRPTA can be as confusing as dealing with many other regulations enforced by the IRS (Internal Revenue Service), so we recommend you seek help with an expert attorney in Florida to guide you throughout the process.

What is the Reason Behind the Establishment of FIRPTA?

The Foreign Investment in Real Property Tax Act was enacted to mitigate the government’s loss on capital gain tax by foreign individuals or entities upon the sale of real estate.

According to FIRPTA, a “foreign person or entity” can be defined as a non-resident alien individual, corporation, trust, or foreign estate.

The problem is that FIRPTA may complicate real estate transactions more often than not, causing property sellers to pay tax over what is owed.

How to Avoid FIRPTA Withholding – Understanding the Concept

To facilitate understanding of this issue, we will apply a real-life example. For instance, let us say we have two individuals, called Jean and William.

Jean is a French-citizen who wants to sell a vacation home located in Destin, Florida. William wants to buy Jean’s vacation home, but since Jean is a non-US citizen and does not reside in the country, both parties will have to deal with FIRPTA.

FIRPTA is a withholding tax, meaning it refers to an amount of money that is set aside to pay for potential taxes in the future. Hence, as Jean is earning US-income when selling his vacation home, he needs to pay an estimated tax on that income.

This way, the amount will be held by the IRS (Internal Revenue Service) until Jean files a US tax return. In case Jean ends up owing less than what was paid in advance, he will get refunded with the difference.

Nonetheless, the IRS will collect the payment from the buyer. Hence, in this particular example, William will be required to withhold 10%-15% of the gross sale’s price from proceeds as a “deposit” due to IRS within 20 days after the transaction’s closing.

In case William fails to fulfill his duties and does not make the payment to the IRS on Jean’s behalf, Jean may be held accountable and have to pay the owed amount by himself.

Avoiding FIRPTA Withholding – Feasible Solutions

First, we need to rely on three basic questions:

• Is the seller a foreign person, as provided by FIRPTA?
• Is the buyer acquiring a US real property interest?
• Is property acquired for use as residence?

If the answer to these three questions is yes and the home sales price is $300,00 or less, no withholding is required under FIRPTA.

Other exemptions to this withholding include situations when:

• The transaction is categorized as a non-recognition transfer.
• The realization of the transaction amounts to zero.

Also, an eligible buyer can execute an affidavit and sign at or before closing stating they intend to use the property for personal purposes, for at least 50% of the time the property is occupied for each of the first 12 months immediately after closing.

For those unaware, an affidavit is a written statement confirmed by oath or affirmation, for use as evidence in court.

Another option is to apply for a withholding certificate using IRS Form 8288-B. Even though a withholding certificate does not exempt any party within the transaction from FIRPTA, it may allow a lesser amount withheld at closing or installment payments.

When the withholding certificate is submitted before the closing date, the 10% amount withheld is paid into the escrow account.

Nonetheless, applying for a withholding certificate may be a complex process, requiring the foreign seller to obtain an ITIN (international taxpayer identification number), and the buyer must present a TIN (taxpayer identification number).

The necessary period for the assignation of an ITIN can vary from 5 weeks to 3 months. Hence, we strongly recommend you seek professional guidance with an expert attorney to oversee your case and help you to solve any issues throughout the process.

We Can Help You to Deal with FIRPTA Withholding in Florida

The attorneys at Jurado & Farshchian, P.L. are well-versed in the details concerning FIRPTA and any other related laws and regulations.

You do not need to waste time and money. Call us at (305) 921-0440 or send us an email at Romy@jflawfirm.com to schedule a consultation today.