FIRPTA -Foreign Investors in real Property Taxation ACT
The FIRPTA law is part of the taxation code of The United States, and as such the Internal Revenue Services (IRS) is responsible for compliance with the taxation and collection of the tax. Therefore, the penalty provisions that apply to late income taxes may also apply to improper FIRPTA filing and withholding.
If you are working with buyer and you know the seller is not a United State citizen then you must make sure that Listing Agent has made the seller aware if his or her responsibilities. There is nothing worse than not being able to move into a new house because the seller thinks $35,000.00 or more is missing from the seller's bottom line.
The Law provides that a NON-RESIDENT Alien is liable for capital gains taxation when he or she sells real property in the United State. The law further requires the buyer or an agent of the buyer of property from non-resident alien to withhold 10% to 15% of the purchase price to insure the Internal Revenue Services that such taxes will be paid.
As with many laws, the exceptions are more important that the law itself. The exception apply only to withholding requirement not to the issues of whether the Seller will owe taxes or not. Whether or not the Seller has taxation based on their sale is determined only by the Internal Revenue Service, and is not necessarily determined at the time of closing.
The first exception to the withholding requirements is that if the purchase price of the real property is $300,000.00 or less, and the buyer is planning to reside in the real estate as their primary residence for the next six months then the Internal Revenue Service docs not require the Buyer or the Buyer's agent to withhold the 10% of the sale price. This rest is easy to apply. All that the agent has to do is review the sale price and ask the Buyer if they are purchasing this property as their primary residence. If this is the case then no withholding is required. The title company will request an affidavit to confirm this exception.
The Second exception is when the Seller holds a valid green card. In this instance the Internal Revenue Services has decided that the alien is to be categorized as a Resident alien. The title company should request a copy of the green card for their files and may also request an affidavit to confirm the green card status.
The third exception to the withholding requirement is more complex. This exception determines whether the Seller is a resident or non-resident alien. The test that the Internal Revenue Services has approved is as follows:
Part 1: The Seller has been in the United States for 31 days during the current calendar year, and
Part 2: The Seller has been in the United States for 183 unit days for the past tree years. The following formula is to be used to figure out the amount of unit days the seller has been is the United States.
Each day the Seller has been in the United States in the 365 days preceding
(1st year) the closing is counted as 1 day;
Each day the Seller has been in the United States in the past 366-730 days
(2nd year) preceding the closing is counted as 1/3 days; and
Each day the Seller has been in the United States in the past 731-1095 days
(3rd year) preceding the closing is counted as 1/6 day.
Example of Formula: The Seller has been in the United States for the following amount of days in the past three years.
2001 120 days= 120 unit days
2000 120 days = 40 unit days
1990 120 days= 20 unit days
Total 360 days= 180 unit days
This seller would be obligated to have withholdings.
IV: Foreign Corporations
Foreign corporations are exempt from required FIRPTA withholding if they have made the proper election under section 897(t) of the tax code. You should ask your corporate client if they have made such an election. If not they will be subject to withholding unless the property is under $300,00.00 and the purchaser plans to reside in the property as his permanent residence for the next 6 months.
V: What to do??????
If you are about to take a listing where you believe that the transaction involves a foreign Seller. Tell your Seller that they must hire a Certified Public Accountant or tax attorney from Florida to guide them through the complex tax issues involved with foreigner selling real property in the United States. Secondly, try to apply one of the three exceptions above to determine if there will be required withholding by the title company at closing. If there will be withholding, advise your client of this right away, but let them know that in the most instances not all of the withholding will be kept by the Internal Revenue Services as tax. The withholding will always be 10% of the purchase price. Finally, let the title company know immediately that there is or is not required withhold. The title company does not have all of the fact relevant to making that determination without talking to you.