SETCO has had inquires about the Foreign Investment in Real Property Tax Act (FIRPTA). The FIRPTA of 1980 was enacted to treat foreign and domestic investments in U.S. real property more comparably.
- *So who is considered to be a foreign person?
As defined by FIRPTA, a foreign person falls under the following:
- Non-resident aliens (even with a social security number).
- Foreign corporations that have not elected to be treated as domestic corporations.
- Foreign partnerships, trusts or estates.
- Disregarded entities (i.e. sole member LLC) unless the LLC elected to be treated as a partnership or corporation.
Note: A resident alien, with a green card is not considered a foreign person and FIRPTA does not apply.
- *What is the withholding requirement?
- In a case where FIRPTA applies, 10% of the gross sales price must be withheld and remitted to the IRS within 20 days of closing, using 8288 and 8288-A.
- 10% is a deposit which is applied to any actual tax liability the seller may have for the year of the sale.
- In this case, the buyer is considered the “statutory withholding agent” for the IRS, and is responsible for determining whether FIRPTA applies and remitting to the IRS.
- Failure to comply with these requirements may leave the buyer and title agent responsible for interest and penalties.
- *What are the exceptions to withholding requirement?
- Non-Foreign Certifications:
o If an individual seller furnishes the buyer with a Non-Foreign Person Certification (Individual Transferor), then no withholding will be required.
o If a foreign corporation that has elected to be treated as a domestic corporation and furnishes the buyer with a Non-Foreign Person Certification (Entity Transferor), then no withholding will be required.
Disregarded Entity: A disregarded entity (single member LLC) will not be considered a transferor but rather its owner will. A Non-Foreign certification from a single member LLC will not be effective if the member is a non-resident and FIRPTA will apply unless the LLC elected to be treated as a domestic partnership or corporation.
- *When Sales Price is $300k or Less and Buyer Intends to Reside:
- If the sales price is $300,000 or less, an individual buyer may elect to execute an“Intent to Reside” thereby eliminating the withholding requirement. The Intent to Reside is a statement that the buyer or a family member intends to occupy the property for at least 50% of the time the property is used by any person during each of the first two 12-months following closing. There is no obligation for the buyer to sign the Intent to Reside, inasmuch as failure to comply with the occupancy requirement could expose the buyer to additional risk. The buyer has the sole discretion whether to rely on this exception.
- *Withholding Certificates:
- A foreign seller can apply for an exemption from the 10% withholding by applying for a Withholding Certificate (Form 8288-B) from the IRS prior to the closing date.
- When this is complete, the agent can then escrow the 10% until such time as the IRS grants relief. Turnaround time could exceed six months.
- Additionally, the withholding certificate must be submitted with an individual tax identification number, if this is not done than the application will be rejected by the IRS.
- Following this, the IRS will issue a letter stating they have rejected the application and the 10% must be remitted within 20 days of the rejection letter. Unless the seller can provide verification the application for withholding certificate has been filed and accepted by the IRS, you should remit the funds to the IRS.
- *Application to short sale transactions:
- Normally, proceeds do not flow to a seller in a short sale transaction; the 10% withholding requirement still applies.
- In these cases, it becomes important to identify a FIRPTA transaction as soon as the contract is submitted for processing.
- Due to the extended amount of time a short sales transaction takes, the seller may have time to apply and receive a Withholding Certification from the IRS prior to closing.
Please contact SETCO with any additional concerns or questions! We are here to serve you. 850-650-6161 or email us at firstname.lastname@example.org. Jeff Boll, closer and attorney in our Perdido Key office will be happy to answer any questions you may have regarding this subject.
*Source: Stewart Title Guaranty Company