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 the disposition of a U.S. real property interest by a foreign person 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 one who is 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 US Citizen or US national. Second, in order to qualify as nonresident alien, the individual must not have passed the green card test nor the substantial presence test.
Note, the substantial presence test requires that an individual be physically present in the US for at least 31 days during the current year. Additionally, the individual must be present for 183 days during the 3-year period that includes the current year and the 2 years immediately prior. A key element to FIRPTA requires that the real property is located in the US. An alternative to the real 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. It is the purchaser’s duty to determine whether the purchaser from whom he or she is buying an interest in the property is a foreign person or not. As a purchaser, you need to do your due diligence to insure you do not have to withhold any taxes.
How much do I need to withhold?
Recently, there has been a major change in the withholding rate under FIRPTA. Currently, the standard rate is 15% of the realized amount, which is typically the purchase price of the real property. However, if you purchased the real property prior to February 17, 2016, the withholding tax rate is 10%.
May I withhold less than the 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 filing 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.
The above article has been prepared by John McGuire of The McGuire Law Firm. John Is a Denver tax attorney and Denver business attorney and can be reached at www.jmtaxlaw.com