Foreign Sellers and FIRPTA Withholding
Understanding FIRPTA Withholding For Foreign Sellers
The Foreign Investment in Real Property Tax Act (FIRPTA) is a complex and challenging aspect of the U.S. real estate market for both international investors and property sellers. FIRPTA entails tax withholding and reporting requirements for foreign individuals and entities involved in U.S. real estate transactions. Whether you’re an international investor eyeing U.S. properties or a seller dealing with foreign buyers, our team offers critical insight and practical guidance to ensure FIRPTA compliance.
FIRPTA Withholding FAQ’S
What is FIRPTA withholding, and why is it important for foreign sellers?
FIRPTA (Foreign Investment in Real Property Tax Act) requires buyers of U.S. real estate from foreign sellers to withhold 15% of the purchase/sale price and remit it to the IRS. This withholding ensures that any income tax owed by the foreign seller is reported and paid.
How does FIRPTA withholding work in practice?
When a foreign individual seller (not a corporation) transfers U.S. real estate, the purchaser is responsible for withholding 15% of the entire purchase/sale price and submitting it to the IRS within 20 days of closing. This amount acts as a safeguard to cover potential income tax liabilities. The default FIRPTA withholding rate for foreign corporations is 21% of the gross sales price.
Is FIRPTA withholding considered a tax?
FIRPTA withholding is not a tax in itself but serves as a mechanism to ensure timely reporting and payment of any income tax owed by a foreign seller upon transfer of U.S. real estate. The withheld amount may be credited towards the seller’s income tax liability.
Are all foreign sellers required to file a U.S. income tax return?
Yes, regardless of whether they recognize a gain or loss on the sale, all foreign sellers are required to file a U.S. income tax return (Form 1040NR for Non-Resident Aliens) to report the sale and pay any necessary income tax on net capital gains. The return is typically due by April 15th of the following year. **Please note that CPL are not tax attorneys, and we strongly recommend consulting a qualified tax attorney or accountant for specific and accurate information related to your individual circumstances.**
What happens if FIRPTA withholding requirements are not met?
Failure to comply with FIRPTA withholding requirements can result in heavy penalties for the foreign seller, as well as for the buyer and/or withholding agent. It is crucial for all parties to ensure proper compliance to avoid legal and financial consequences.
