Many people are under the impression that FIRPTA is a tax, when, in reality, it is a withholding in the event of a tax liability.
The Foreign Investment in Real Property Tax Act (FIRPTA) requires that non-residents selling US property are subject to a withholding up to 15% of the gross sales price. This withholding is retained until the appropriate paperwork is filed and processed by the IRS. If there is no capital gain due on the sale of the US property, then the seller receives a full refund of their 15% withholding. Otherwise, where gain is calculated, the IRS retains the tax element and refunds the balance to the sellers.
The timing of the filing is critical – the application must be submitted to the IRS on or before the date of closing otherwise it is deemed late and the 15% must be submitted to the IRS.
If you are a foreign seller the US government will withhold 15% of the sale proceeds to cover any unpaid taxes under the FIRPTA tax code.
You have the option of filing for the FIRPTA withholding certificate or leaving the 15% to go to IRS and claim back any refund on your tax return the following year.
If you are a US National Buyer.
The title company will require your social security number to process the file.
Filing for early release
Assuming the 15% withholding is held by the title company the timing is around 90 days for the application to be processed by the IRS and the withholding certificate issued so the withheld funds, minus any CGT (capital gains tax), can be released.
You can file for early release via your accountant who will work in conjunction with the title company to make sure your FIRPTA is processed correctly.
Selling with a mortgage.
If you are selling a property and have a mortgage be aware that 15% of the proceeds will be with withheld. This mean if the mortgage payoff and closing fees are greater than the sum of the proceeds you will have to bring the difference in cash to the closing.
This program allows you to exchange like investment properties and not be subject to Capital Gains Tax, if you make significant profit and intend to reinvest you can use the 1031 Exchange Program to save you CG tax.
You want to have the FIRPTA taken care of before you sell, and sooner rather than later. This does not apply to US citizens selling (Uncle Sam knows where to find them!).
The need for an ITIN Number
If you are buying property from a foreign seller FIRPTA affects you also.
In order to withhold the 15% the IRS require the buyer to have an ITIN number (Individual tax identification number) and that is something you will have to arrange before closing. You can read more on obtaining an ITIN number HERE.
That’s the bad news, the good news is there is someone who can help and that’s the start of a clear path forward and our foreign tax associates will be able to assist. Now you know why you need a vacation home specialist!