FIRTPA Basic Exceptions

What is FIRPTA?

FIRTPA is the acronym for Foreign Investment in Real Property Tax Act. The purpose of the act is to address the concern that it would be extremely difficult, if not impossible, to collect income tax from a taxpayer who resides abroad, especially if – after the sale – he or she does not own real estate property in the United States anymore.

Exceptions to FIRTPA

FIRTPA rule is that the Buyer shall withhold 15% of the purchase price of a real estate transaction. As for every rule, it has certain exceptions: here we provide a list of the most common ones:

  • The price of the property is no more than $300,000 and Buyer, an individual, bought it to use it as his or her primary residence or as the primary residence of his or her family. Specifically, the Buyer or a member of the Buyer’s family has a definite plan to reside at the property for at least 50% of the days within each of the two 12-month cycles following the date of transfer. When counting the number of days that the property is used, do not count the days the property will be vacant.

    The Buyer is liable for failure to withhold if he or she does not reside at the property as required by the exception; however, the Buyer can establish that the failure to reside has been caused by a change in circumstances that could not have been reasonably anticipated at the time of closing, such as the need of more space to accommodate a newborn child, divorce, change of job that require moving.
  • Seller of the property sold is a domestic corporation whose any class of stock is regularly traded on an established securities market, or it is a publicly-traded partnership or trust, except in the case of a disposition of a substantial amount of a non-publicly traded interest in a publicly-traded corporation.
  • Seller gives a certification to the Buyer or the closing agent 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 mailing address.
  • Buyer receives a withholding certificate excusing withholding issued by the Internal Revenue Service.
  • The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
  • The property is acquired by the United States, a U.S. state or possession, a political subdivision, or the District of Columbia.

FIRTPA Certification

Unless Buyer or his or her agent knows that the certification Seller provided is false, Buyer can always rely on it and it goes exempt from every sanction in connection with the veracity of the statement.

Buyer can be required to furnish a copy of the certification to the IRS promptly and following a certain provision; should Buyer fail to do so in the time and manner prescribed, the certification will not be effective.

Liability of Buyer, its agents, and Withholding Agent

If Buyer, its real estate agent or the closing agent has actual knowledge that the certification is false, the real estate agent or the closing agent must notify Buyer, or they will be held liable for the tax within the limit of the compensation received for the transaction.

However, a Withholding Agent is personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest.  A Withholding Agent is any person having the control, receipt, custody, disposal, or payment of income that is subject to withholding.

You are protected in a FIRTPA situation as typically the Withholding Agent personally covers the risk connected to the withholding, but having somebody who has experience in international real estate transactions and who knows exactly how to face their challenges helps.

When does FIRTPA apply?

What is FIRPTA?

FIRTPA is the acronym of Foreign Investment in Real Property Tax Act. Purpose of the act is to address the concern that it would be extremely difficult, if not impossible, to collect income tax from a taxpayer who resides abroad especially if – after the sale – he or she does not own real estate property in the United States anymore.

Who is subject to FIRPTA?

The seller of real estate property in the United States is a subject to FIRPTA when he is not a US person but a foreign person for tax purposes. The buyer can rely on the affidavit provided by the seller to determine what is the seller’s status, unless the seller has reason to believe that the affidavit is false. A foreign person is a nonresident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust, or estate. Each of those categories need to be examined separately:

Individuals:

A seller who is a US citizen or a US permanent resident/green card holder is exempt from FIRPTA withholding.

If the seller does not have US citizenship or a green card, he can still be considered a US person for tax purposes if he passes the substantial presence test, which consider whether the individual has spent sufficient time in the United States to make him subject to taxation. But how does the substantial presence test work?

The substantial presence test is met when the individual has been in the United States:

  • For at least 31 days during the current year (so that the individual cannot pass the test for the current year if applied in January); and
  • For at least 183 days in the year period that include the year being tested (the current year, if it is the one being tested) and the two years before the year being tested. The days should be pondered as follow:
    • The total amount of days of the year being tested;
    • 1/3 of the days of presence for the year before the year being tested; and
    • 1/6 of the days of presence for the year before the year being tested.

Finally, the substantial presence test has its own exceptions. For example, if the person is present in the United States under a F Visa (student visa) he or she will be considered non-US persons for tax purposes and so subject to FIRTPA.

Entities: 

US entities are not subject to FIRTPA. Once again, it will be necessary to determine who is considered to be a US entity.

  • Corporations incorporated in the United States or proving that they elected to be taxed as a domestic corporation under I.R.S. § 897(i) are US persons for tax purposes. Exception: a US corporation that is not publicly traded and has more than the 50% of its assets in real estate interests (a real estate holding entity) is considered a foreign entity.
  • Partnerships organized in the United States, which are always multi-members, are US persons for tax purposes; the withholding will not affect the sale of the real estate interest, but the taxable income of the partnership.
  • Limited Liability Companies do not exist for tax purposes: if single-member, a limited liability company is transparent and so considered as an individual for tax purposes; if multi-member, a limited liability company is a fiscal entity taxed as a partnership. However, limited liability companies can elect to be treated as corporations for tax purposes.
Trusts: 

To be considered as a US person for FIRTPA purposes, a trust needs to pass a two prong test:

  1. The “court test”: whether a court within the US can exercise primary supervision over the administration of the trust, which is determined by where the administration is located and by whether a US court would be heard in case of dispute over the administration of the trust.
  2. The “control test”: whether the trustees qualifying as US persons have the authority to control all substantial decisions of the trust, and are in no way subject to the decisions of trustees who are not US persons.

A First Introduction to FIRTPA

What is FIRPTA?

FIRTPA is the acronym of Foreign Investment in Real Property Tax Act. Purpose of the act is to address the concern that it would be extremely difficult, if not impossible, to collect income tax from a taxpayer who resides abroad especially if – after the sale – he or she does not own real estate property in the United States anymore.

Why FIRTPA creates a burden to the Buyer?

A question you may ask yourself is: why Buyer is involved in a tax matter that regards Seller? The answer is: because the solution that the IRS created to secure payment of taxes related to the capital gain on the transaction is to make the Buyer a withholding agent of Seller.

In fact, by definition Buyer has FIRTPA puts Buyer in charge of withholding and paying a portion of the purchase price to the IRS at closing, to cover the anticipated tax liability Seller will have as a consequence of the sale.

The final taxable amount is determined when the tax return is filed in the year following the transaction: at that time the IRS will directly refund Seller of any credit he or she may have (or, in the rare case in which an additional income tax is due, Seller will have to pay the difference to the IRS).

How much needs to be withheld?

Seller shall withhold the 15% of the purchase price and pay it to the IRS within twenty (20) days after the date of the closing; the amount is considered as paid when the forms to be sent to the IRS are postmarked. The closing agent will perform this operation on behalf of Buyer; typically, the withholding appears as a debit on the Seller’s side of the closing statement.

The closing agent will cooperate with Seller’s tax lawyer or accountant for the preparation and the submission of the required documents to the IRS.

If Seller has never filed taxes in the United States and so he or she does not have a Social Security Number, an ITIN number can be requested simultaneously with the payment of the withholding to the IRS. Typically, Seller will need to provide a certified and apostilled copy of the passport.

There are special circumstances in which a reduced withholding, or no withholding, is required. Those circumstances will be better explained in another article.

Who is subject to FIRPTA?

Seller of real estate property in the United States is a subject to FIRPTA when he or she is not a US person but a foreign person for tax purposes. A foreign person is a nonresident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust, or estate. However, Buyer can rely on anaffidavit provided by Seller to determine what is Seller’s status, unless Seller has reason to believe that the affidavit is false.

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