FIRPTA is an IRS tax regulation created in 1980 to ensure that non-resident aliens file U.S. income tax returns and pay taxes on income earned by the foreign person which is generated in the U.S.
FIRPTA requires 15% for transactions which close on or after February 17, 2016, of the total amount realized (generally the sales price) be withheld and forwarded to the IRS whenever the Seller is a “Foreign Person”. IRS defines a “Foreign Person” as a nonresident alien individual, foreign
corporation, foreign partnership, foreign trust, or foreign estate. It does not include a resident alien individual.
FIRPTA imposes the obligation to withhold upon the BUYER who is considered the “withholding agent” by IRS. The IRS may hold the Buyer, Agent(s) or the Title Company responsible for ANY taxes owed by
the foreign seller if no withholding is done.
The required withholding may be applied to any tax liability owed by the Seller. This would be applicable to capital gain taxes, but would also include such taxes as payroll tax, income tax, etc. The IRS retains the held funds until a determination is made regarding any taxes owed by the foreign Seller. After proper filing of applicable tax returns and deduction of applicable taxes, the remaining funds, if any, are returned to the Seller by the IRS.
Buyer and Seller must direct the Title Company to withhold under FIRPTA. Otherwise, Title Company will not close the transaction without one of the following:
Withholding Certificate (before closing) from IRS indicating no taxes are due.
FIRPTA Exemption Acknowledgement declaring an exemption, signed by BOTH buyer and seller.
FIRPTA/Sale by Foreign Person (Waiver of Escrow Responsibility)
Seller AND BUYER must have a U.S. Tax ID number (TIN) in order to withhold and remit to IRS. If the seller does not have a TIN, he must make application for a TIN as soon as possible, preferably before escrow is ready to close. If the Seller (or Buyer) does not have a TIN by close of escrow, a copy of the W-7 (Application for IRS Individual Taxpayer Identification Number) which was sent to the IRS can be provided to escrow. If the Seller cannot, or will not, provide a US TIN, the Seller will not receive any
refund of money held.
Heavy penalties and fines are possible for failure to withhold, and for improper withholding or failure to send the funds to the IRS within 20 days after the closing. The IRS will look to the buyer for ALL taxes, fines, and penalties. There is no statute of limitation on unpaid IRS taxes.
DETERMINING IF FIRPTA APPLIES
If the seller is NOT a “foreign person” he/she is exempt. A “W-9” or other non-foreign Affidavit may be used to document the exemption. This exemption can be signed by the following:
U.S. Green Card Holder
A non-citizen who meets the “substantial presence test”. Detailed requirements can be obtained from the IRS website.
Common Exemptions to FIRPTA
1. The transferor (Seller) furnishes FIRPTA Exemption Acknowledgement declaring an exemption, signed under penalty of perjury and acknowledged by the Buyer. Actual knowledge, by any party to the
transaction, that the affidavit is false can subject that party to prosecution and financial liability.
2. The transferor (Seller) receives a “Withholding Certificate” stating that no taxes are owed or stating the amount of taxes owed, which must be paid at closing. This must come from IRS and must be obtained BEFORE closing of escrow. It must be specific to the subject transaction and can be
requested as soon as the purchase agreement is executed by Seller and Buyer.
3. The property is being sold for less than $300,000 AND the Buyer or a member of the Buyer’s family intends to occupy the property for at least 50% of the first 2 years during which the property is occupied.
4. If the property is sold for more than $300,000, but less than $1,000,000 AND the Buyer or a member of the Buyer’s family intends to occupy the property for at least 50% of the first 2 years during which the property is occupied, withholding is still required but at the reduced rate of 10%.
Information and IRS forms can be obtained directly from the following IRS websites:
Thank you for reading our post, FIRPTA – A Helpful Guide to the ‘Foreign Investment in Real Property Tax Act of 1980.’ For more Las Vegas Real Estate buyer tips, information on homes for sale, or general Las Vegas real estate information please visit our website www.jackwoodcock.com or visit our Facebook page https://www.facebook.com/TheJackWoodcockGroup/