FIRPTA Changes: New Withholding Tax Requirements

The Foreign Investment in Real Property Tax Act (FIRPTA) is a federal law that imposes a tax on foreign persons when they sell or otherwise dispose of real property in the United States. The purpose of this law is to ensure that foreign sellers of U.S. real estate fulfill their income tax obligations on any profit realized from the sale. The responsibility for this process falls on the buyer, who acts as a withholding agent for the Internal Revenue Service (IRS).

Legislative changes have altered provisions of FIRPTA, affecting the amount of money that must be withheld at the time of sale and introducing new exceptions. These modifications impact the standard withholding rate and create specific rules for properties intended for use as a personal residence. Understanding these updates is necessary for both foreign sellers and domestic buyers.

Updated Withholding Rate

The standard FIRPTA withholding rate was increased from 10 percent to 15 percent of the amount realized from the sale. The “amount realized” is the gross sales price of the property. This change was intended to improve tax compliance among foreign sellers of U.S. real estate.

The responsibility for withholding this amount does not fall on the foreign seller. Instead, the buyer or their settlement agent is designated as the withholding agent under the law and is required to calculate, withhold, and remit the 15 percent tax to the IRS.

This withholding is a prepayment of the seller’s potential tax liability, not the final calculation of tax due. The foreign seller is still required to file a U.S. income tax return, such as Form 1040-NR for individuals, to report the sale and claim the withheld amount as a credit towards their actual tax liability.

If the withholding exceeds the actual tax owed, the seller can receive a refund from the IRS. Failure to properly withhold and remit the funds can result in the buyer being held liable for the tax, plus interest and penalties.

New Exemptions and Rate Reductions

A tiered system of exemptions and rate reductions was introduced, primarily focused on transactions involving personal residences. These rules lessen the withholding burden in specific transactions where the buyer intends to live in the property.

For properties with a sales price of $300,000 or less, a complete exemption from withholding may apply. This 0% withholding is contingent upon the buyer acquiring the property for use as their residence. The buyer must have definite plans to reside in the property for at least 50 percent of the days it is in use during each of the first two 12-month periods following the transfer.

A reduced withholding rate applies to properties sold for a price between $300,001 and $1,000,000. In these cases, if the buyer intends to use the property as a personal residence, the 10 percent withholding rate is maintained. For example, on a sale of $750,000, the withholding would be $75,000, provided the buyer signs an affidavit stating this intent.

Once the sales price exceeds $1,000,000, the full 15 percent withholding rate applies, regardless of the buyer’s intended use. For instance, a sale of a $1.2 million home would require a withholding of $180,000.

Information Required for FIRPTA Filings

The withholding agent, typically the buyer or a settlement agent, must gather specific information from both parties to the transaction. This data is necessary to complete and file the required documentation with the IRS. Key details include the full name, address, and Taxpayer Identification Number (TIN) for both the foreign seller and the buyer.

A clear description of the property, the date of the transfer, and the total amount realized from the sale are also required. This information is used to populate Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests. This form is used to report and transmit the withheld funds to the IRS.

Form 8288 must be filed along with Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, for each foreign seller. The IRS stamps Form 8288-A upon receipt and mails a copy back to the seller, which serves as proof of payment for their tax return.

If the seller believes the 15 percent withholding is excessive compared to their actual tax liability, they can apply for a reduction. This is done by submitting Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, to the IRS on or before the date of the closing.

Process for Remitting Withheld Tax

The withholding agent must file Form 8288 and Form 8288-A, along with the full payment of the withheld amount, within 20 days of the date of transfer.

The completed forms and the payment are mailed to the specific address designated by the IRS for FIRPTA submissions. It is important to verify the correct mailing address on the IRS website or in the form instructions. Payment should be in the form of a check, money order, or through the Electronic Federal Tax Payment System (EFTPS).

If the seller has applied for a withholding certificate using Form 8288-B, the process is slightly different. The application must be submitted to the IRS no later than the closing date. The withholding agent is still required to withhold the full 15 percent at closing, but they are not required to remit the funds to the IRS until the 20th day after the IRS mails a copy of the withholding certificate or a denial notice.