It can be difficult to sell properties in the United States as a foreign investor. This article attempts to explain The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) surrounding dispositions of U.S. real property interest by a foreign person. Learn exactly what you need to know about FIRPTA and if you should withhold FIRPTA. FIRPTA provides that funds received from a transfer of real estate by a non-US citizen are subject to notice and withholding requirements in compliance with Section 1445 of the Internal Revenue Code. FIRPTA authorized the United States to tax foreign persons on sales of U.S. real property interests. FIRPTA requires that a buyer purchasing U.S. real property from a foreign person withhold 15% of the gross purchase price of the property. The amount withheld must be submitted within 20 days after the day of closing. Before you make any decisions on FIRPTA, it is important to speak with a knowledgeable New York foreign investment lawyer. A skilled foreign investment lawyer could help you in identifying properties that are available to foreign investors and addressing any challenges that might arise due to foreign ownership. What is FIRPTA?The Foreign Investment Real Property Tax Act (FIRPTA) is a US law that enforces a withholding tax on US real property interest sales made by foreign sellers. FIRPTA allows the US to levy taxes on foreign individuals who dispose of US real property interests, such as selling interests in parcels of real estate and shares in particular US corporations regarded as US real property holding corporations. The goal of FIRPTA is to ensure that foreign investors pay taxes on profits earned from the sale of US real estate properties, addressing concerns that they were buying US real estate and selling it without paying taxes to the United States. FIRPTA requires a withholding tax of 15% on the gross proceeds of a foreign seller’s real estate property sale. When purchasing US real property interests from foreign sellers, certain purchasers’ agents and settlement officers must withhold 10% of the amount realized (with specific rules for foreign corporations). This withholding is intended to ensure US taxation of gains realized on the disposition of such interests. The transferee, or buyer, is the withholding agent and is responsible for ensuring that the transferor is not a foreign individual. Failure to withhold may result in the transferee being responsible for the tax liability. When a US corporation or partnership sells a US real estate asset, the entity itself acts as the withholding agent. In some cases, a foreign seller may be able to receive all proceeds from the sale of the property after filing the appropriate taxes. When the Seller is Considered a Foreign PersonFIRPTA regulations apply to the seller but if you are the buyer, you must find out if the transferor is a foreign person. If they are a foreign person and you fail to withhold, you may be held liable for the tax. A foreign person is considered any individual who is not a U.S. citizen or a U.S. national. A non-resident is a person who does not have a green card or has not passed the substantial presence test. The Substantial Presence Test allows a person to be considered a United States resident for tax purposes if they meet the test for the calendar year. To meet the requirements of this test, a person must be physically present in the United States on at least:
If the test above indicated the seller is not a foreign person, the buyer should obtain and file a FIRPTA affidavit from the seller, attesting to the seller’s nonforeign status. FIRPTA withholding is not required if the seller is considered a U.S. resident for tax purposes. Exceptions to FIRPTA WithholdingUsually, the transferee/buyer is the withholding agent. However, FIRPTA withholding may not be required under the following circumstances; but, notification requirements must be met:
According to the IRS, additional exceptions may apply. FIRPTA withholding rules are very complex and given the hazards buyers face, FIRPTA should be withheld when in doubt. You should contact a professional CPA or a licensed attorney for more information. Seller Withholding CertificationThe amount that must be withheld from the disposition of a U.S. real property interest can be adjusted following a withholding certificate issued to the IRS. The transferee, transferee’s agent, or the transferor may request a withholding certificate. These requests generally take about 90-120 days to process after the receipt of a complete application. A transferor must notify the transferee in writing that the certificate has been applied for on the day or the day prior to the transfer. If a Withholding Certificate was applied for, required funds must be submitted within 20 days of the Withholding Certificate notice. A withholding certificate may be issued due to:
This article is not legal or tax advice. If you are in need of legal or tax advice, our experienced real estate attorneys may be able to help. Leave your contact details on our online form now to get in touch so you can make the process of buying and selling a home simultaneously go as smoothly as possible. Via https://sishodia.com/should-i-withhold-firpta-at-closing-on-sale-of-ny-home-if-i-am-not-a-citizen/
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