What FIRPTA Tax Is And How It Works

Editorial team of TFX

• 01.10.21 • 5 min read

This is the time when the classic Latin phrase "buyer beware" comes in handy, as real estate markets from the First Coast to the West Coast resemble piranha tanks: list a house for sale and watch it gather interest. 

Deep-pocketed investors are squeezing would-be homeowners out unless they have plenty of cash. There are more foreign individuals, corporations, and governments investing than ever before.

What is FIRPTA?

Tax implications are often complex when a foreign seller is involved in a real estate transaction. There are several such provisions, but the Foreign Investment in Real Property Tax Act (FIRPTA) is particularly important. Under this law, the buyer must withhold FIRPTA tax at 15 percent of the purchase price at closing to pay the seller's tax obligation, which serves as an estimate of the capital gains taxes due. However, even a loss-making sale is covered by FIRPTA. 

A new FIRPTA withholding tax rate of 15% was established in February 2016, up from the previous 10%. There is no deduction for the actual gain or loss in the tax calculation as it refers to the gross sales price. The result is that foreign real estate sellers face the possibility of a 15% tax withholding from gross proceeds, even on a loss transaction.

Who pays FIRPTA tax?

The FIRPTA taxes foreign persons whose capital gains are derived from disposing of U.S. real property. The funds must be withheld at the time of sale and remitted to the IRS within 20 days following closing. 

It's typically the buyer's responsibility to make sure the IRS receives its money within twenty days. Buyers are often withholding agents and are responsible for sending funds to the IRS. This is normally facilitated by the title company, but this does not absolve the buyer of their withholding agent responsibility.

Consider the following scenario (as a foreigner): you sell an investment property for $1,000,000. Purchasers are in the legal position of withholding $150,000 of the sale price for remittance to the IRS. 

Buyers of U.S. real property interests, in most cases, must file Form 8288 and Form 8288-A. Buyers who do not withhold the FIRPTA tax amount, do not file the form on time, and fail to submit the withholding can be penalized.

Is FIRPTA withholding refundable?

Withholding of the FIRPTA tax is levied at the time of the transaction on non-American real estate sales. In reality, the withholding tax isn't really a tax, instead, it's more of a security deposit to guarantee that the real tax is eventually paid by the individual. Upon filing their tax returns at the end of the year, the seller may be able to obtain a full or partial refund.

The amount that needs to be withheld by the IRS upon the disposition of an American real estate interest can be adjusted according to a withholding FIRPTA certificate. If needed, a withholding FIRPTA certificate can be requested by the buyer, the buyer's agent, or the seller. In general, the IRS will respond to tax refund requests within 90 days of receiving a completed application with all Taxpayer Identification Numbers (TINs) of the parties to the transaction. A seller must inform the buyer in writing exactly when he applies for a withholding FIRPTA certificate, either the day of the transfer or the day prior.

What are FIRPTA exceptions?

Withholding FIRPTA tax is generally not required in the following situations:

• Property sells for $300,000 or less, and

• During or before closing, buyers sign an affidavit that states they intend to use the property for personal purposes for at least 50% of the time that property is occupied for the first two 12 month periods following closing

• Taxpayers categorized as foreign include nonresident alien individuals, foreign corporations not treated as domestic companies, and foreign partnerships, trusts, and estates. The withholding of FIRPTA doesn't apply to U.S. citizens or U.S. permanent residents (green card holders)

• The IRS - issued Withholding Certificate was filed before or on the date of the closing

• A transfer of U.S. real estate interests results in the transferor realizing zero money

• A state, a district of Columbia, a political subdivision, or the federal government buys the real estate.