FIRPTA stands for Foreign Investment in Real Property Tax Act. It is not a tax, but a required withholding. The U.S. imposes a 10-15% withholding tax on sales of U.S. real property by foreign sellers.
WHAT IS FIRPTA?
- FIRPTA applies to non-US residents
- It’s a tax payment withheld from sales proceeds
- The FIRPTA withholding is usually 10-15% of the total sales prices
- The tax withholding is coordinated between the Buyer, the Seller, and the Title company
- The buyer and the seller both have responsibilities under FIRPTA
HOW FIRPTA WORKS
Congrats on your sale!
As a foreign individual, you are subject to FIRPTA.
First, it requires having a US Individual Tax Identification Number (ITIN). As an Acceptance Agent, Duane Eckelberg can facilitate issuance of the ITIN – prepare the application, assemble all of the required documentation, and forward the completed package to the IRS for you.
The mandatory withholding amount is 10% or 15% of the sales price.
- The withholding is 10% if the sales price is between $300,000 and $1,000,000 and the buyer plans to use the property for personal use more than 50% of the time the property is being used for the first 2 years after purchase.
- The withholding is 15% if the buyer plans on renting the property or if the sales price is $1,000,000 or more.
- There are exemptions from FIRPTA withholding. We can help you through the entire withholding process and potentially arrange for a lesser amount of withholding.
Upon close, the Title company will issue the check to the IRS from the seller’s funds and mail the check. We work with Title companies to prepare the required forms.
The withholding is almost always higher than the actual tax, so you will need to file tax returns after year end in order to recover the excess withholding. Most states also require a state income tax return. You may owe state income tax if the state did not require withholding. We prepare these returns.
Congrats on buying property!
As the buyer, you are responsible for the required withholding. This means that you will sign the withholding tax return form and you are responsible for sending the withholding to the IRS. However, in actuality, the Title company always issues the check to the IRS from the seller’s funds and mails the check.
We work with your Title company to prepare form 8288-8288A, US Withholding Tax Return, required under FIRPTA.
If the sales price is under $1,000,000 the law does permit the required withholding to be reduced from 15% to 10%. The rule is that you or your family must plan to use the property for personal use more than 50% of the time the property is being used for the first 2 years after purchase. For example, you can rent the property for 3 months a year but must then use it for your own use for at least 3 months plus 1 day.
A US Individual Tax Identification Number (ITIN) or Social Security Number is also required. If you do not have one, we can facilitate issuance of the ITIN – prepare the application, assemble all of the required documentation, and forward the completed package to the IRS for you. Duane Eckelberg is an IRS Acceptance Agent authorized to assist individuals and other foreign persons who do not qualify for a Social Security Number but who still need a Taxpayer Identification Number (TIN) to file tax returns and other filings.
FREQUENTLY ASKED QUESTIONS
I have a FIRPTA sale closing soon, how can you help me?
We handle all the tax forms and make the process as smooth and easy as possible. We optimize all possible deductions and take into account your specific circumstances to ensure everything is to your best advantage. More importantly, we keep the IRS out of your life!
Our FIRPTA services include:
- ITIN (Individual Taxpayer Identification Number) applications
- Form 8288-8288A (US Withholding Tax Return) preparation
- Form 8288-B (Withholding Certificate) preparation
- Individual Tax Returns
I am selling property in Arizona, can you help?
Great! Eckelberg & Wienshienk is located in the Phoenix/Scottsdale area. We specialize in FIRPTA sales and work with a lot of local realtors and Title companies. If you are a foreign individual selling your home in Arizona, it is our pleasure to assist you.
If you are in the area yourself, we can even schedule an in-person appointment! Contact us today.
What is an ITIN and why do I need it?
An ITIN (Individual Taxpayer Identification Number) is an identification number used by the IRS in the administration of tax laws. Nonresident and resident aliens who cannot get a Social Security Number but need to be identified for taxation need to be issued an ITIN.
Duane Eckelberg is an Acceptance Agent. This means he is authorized by the IRS to assist you in obtaining an ITIN. He can review your documentation and forward the completed forms to IRS for processing.
Do I need to file a US tax return?
Yes. Every foreign seller is required to file a US income tax return after year end to report the sale and pay any necessary income tax on net capital gains.
The withholding is solely based on the sales price and not on the net capital gains, which is the profit realized on the sale, after subtracting the original purchase price and deductions. Tax returns need to be filed in order to recover the excess withholding.
In the US, State and Federal require two different returns. Most states do not require withholding and therefore, sellers may owe State income tax.
What is the difference between repairs and improvements?
We are often asked the difference between a repair and an improvement. Certain improvements may be used for tax advantage. Generally speaking, improvements add significant value to the property or extend its life, whereas repairs are necessary maintenance to keep the property in habitable and working condition.
For general information between a repair and an improvement, click here.
FIRPTA can seem daunting. We are here to help!