Many people have questions relating to FIRPTA and the relating withholding tax requirements. Below are common questions and answers related to FIRPTA, but please remember to consult directly with your tax attorney and other tax advisors.
What is FIRPTA?
FIRPTA is a withholding tax requirement for a foreign person’s disposition of a U.S. real property interest that is reported on Form 8288.
Do I need to report it?
If you are a foreigner transferring an interest in any real property in the U.S., you are subject to the FIRPTA requirements. Further, if you are purchasing an interest in any real property from a foreigner, you may be subject to the withholding requirements for tax purposes under FIRPTA.
Who qualifies as a foreigner?
The IRS defines a foreign person as a nonresident alien or a foreign corporation that has not made an election under the Internal Revenue Code section 897(i). As a purchaser, it is your responsibility to determine if the seller is a foreign person based on the definition provided by the IRS, which can be broken down into two components. First, an alien is an individual who is not a U.S. Citizen or U.S. national. Second, to qualify as a nonresident alien, the individual must not have passed the green card test or the substantial presence test.
Note that the substantial presence test requires that an individual be physically present in the U.S. for at least 31 days during the current year. Additionally, the individual must be present for 183 days during the 3 years, including the current year and the two years immediately prior. A pivotal element to FIRPTA requires that the real property is located in the U.S. An alternative to the actual property location requirement is an interest in a domestic corporation.
If the seller of the real property is a foreigner and you fail to withhold the appropriate amount of tax, you may be on the hook. The purchaser has to determine whether the purchaser from whom they are buying an interest in the property is a foreign person or not. As a purchaser, you must do your due diligence to ensure you do not have to withhold taxes.
How much do I need to withhold?
In the past few years, the IRS has made changes to the withholding rates. On February 17, 2016, Congress passed the Tax Cuts and Jobs Act (TCJA), which included a provision allowing taxpayers to elect to pay taxes at a lower rate. If you purchased your real estate before February 17, 2016 and you meet specific criteria, you may be eligible to claim the lower withholding rate. You must file Form 8949, Election To Pay Lower Rate, within 60 days after the date you filed your return for the year in which you paid the highest federal income tax rate.
May I withhold less than 15%?
Maybe. If you calculate your tax liability for the disposition of the real property, and this is lower than the reporting requirements under FIRPTA, you may qualify for a lower withholding rate. This is determined by filling out Form 8288-B.
The most common exception to the FIRPTA withholding tax involves the sale or transfer of a residential property not more than $300,00.00. In addition, either the individual or a family member must plan to live at the property for at least 50% of the days that the property is used for the two years following the transfer. If you qualify under this exception, you may not be required to withhold tax under FIRPTA.
*John McGuire of The McGuire Law Firm prepared the above article. John Is a Denver tax attorney and Denver business attorney and can be reached at www.jmtaxlaw.com