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What Is FIRPTA, and How To Strategize With Buyers & Sellers

Title Manager Alexandra Nieto and Closer David Velez explain the nitty-gritty of What is FRIPTA.

Quick Takeaways

  • FIRPTA is a U.S. federal tax law that applies to the sale of U.S. real property interests by foreign persons or entities.
  • Under FIRPTA, the buyer of a U.S. real property interest from a foreign person or entity is required to withhold a percentage of the sale price and remit it to the IRS to ensure the foreign seller pays any taxes owed on the gain from the sale of the property.
  • Working with a team that understands FIRPTA is important for real estate professionals and can help ensure a smooth transaction.

What Is FIRPTA?

FIRPTA stands for the Foreign Investment in Real Property Tax Act. It is a United States federal tax law that applies to the sale of U.S. real property interests by foreign persons or entities.

Under FIRPTA, the buyer of a U.S. real property interest from a foreign person or entity is required to withhold a percentage of the sale price and remit it to the Internal Revenue Service (IRS). This withholding is intended to ensure that the foreign seller pays any taxes owed on the gain from the sale of the property.

The percentage of withholding depends on various factors such as the sale price, the nature of the property, and the tax status of the seller. The buyer is responsible for withholding and remitting the appropriate amount to the IRS, and failure to do so can result in penalties and interest.

FIRPTA is important for foreign investors to consider when investing in U.S. real estate, as it can have significant tax implications for them. It’s always recommended to consult with a tax professional or attorney who has experience in this area if you are a foreign person or entity considering investing in U.S. real estate.

FIRPTA Basics

ITIN Guidance for Foreign Property Buyers/Sellers(link is external) (Internal Revenue Service, Jan. 4, 2022)

“Foreign sellers of U.S. real property interests need Taxpayer Identification Numbers (TINs) to request reduced tax withholding when disposing of the property interest, and to pay any required withholding. Individuals who do not qualify for Social Security numbers (SSN) may obtain Individual Taxpayer Identification Numbers (ITINs) to meet the requirement to supply a TIN.” This guidance from the IRS explains when ITINs are required for withholding and reduced withholding according to FIRPTA.

Exceptions from FIRPTA Withholding(link is external) (Internal Revenue Service, Nov. 19, 2021)

Guidance from the IRS on circumstances when FIRPTA withholding is not required. The IRS explains the situations where FIRPTA withholding is not required and then explains the certification process for three of the situations. The final discussion is about the liability of the agent or the qualified substitute in FIRPTA withholding scenarios.

FIRPTA Withholding (link is external)(Internal Revenue Service, Nov. 19, 2021)

“The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.” The IRS explains the definitions and common terms in FIRPTA transactions, the rates of withholding, and answers 19 frequently asked questions about FIRPTA withholding situations.

Definitions of Terms and Procedures Unique to FIRPTA(link is external) (Internal Revenue Service, Nov. 19, 2021)

The IRS defines and explains terms and procedures that are specific to FIRPTA, including: dispositions, corporations, partnerships, trusts and estates, US real property interest, foreign person, transferor, transferee, amount realized, US Real Property Holding Corporation (USRPHC).

Reporting and Paying Tax on U.S. Real Property Interests(link is external) (Internal Revenue Service, Oct. 5, 2021)

“Two forms are generally used for reporting and paying the tax required to be withheld on the dispositions of U.S. real property interests by foreign persons to the IRS: Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

Buyers (transferees), who are generally the withholding agents, must use Forms 8288 and 8288-A to report and pay to the IRS any tax withheld on the acquisition of U.S. real property interests from foreign persons. These forms must also be used by corporations, partnerships, estates, and trusts that must withhold tax on distributions and other transactions involving U.S. real property interests.”

To Withhold, or Not to Withhold, That Is the Question: A Step-by-Step Approach to the FIRPTA Income Tax Withholding(link is external) (Florida Bar Journal, Apr. 2018) E

“Under FIRPTA, a foreign seller of U.S. real property is subject to a tax withholding at closing, and the buyer in such transaction is obligated to submit the tax withholding to the IRS.4 This article provides a brief history of FIRPTA and lists the different types of sellers involved in transactions. Further- more, it guides the reader through a step-by-step approach in determining 1) whether the seller is a U.S. person or foreign person (be it an individual, limited liability company, corporation, partnership, or trust); 2) whether the FIRPTA with- holding applies to a given transaction or if it falls under an exception; and 3) what is the amount of the tax withholding. To help guide real estate practitioners through the analysis, included is a FIRPTA paradigm (decision matrix) divided into Part A — Seller Analysis and Part B — Residential Exceptions.”

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