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Foreign Nationals & FIRPTA

Foreign Nationals & FIRPTA

The U.S. Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA) in 1980 to tax foreigner’s profits from the income resulting from the sale of any real estate or other real property held in the United States.

If you’re a foreign national and you sell your interest in a property in the United States, the FIRPTA tax subjects you to a 15 percent withholding tax of the value of the property, even if you sold it at a loss. You must deposit the withholding amount with the U.S. Internal Revenue Service (IRS) within 20 days of the sale closing.

The IRS withholds the tax as a deposit until you file your U.S. income tax returns, which must be by the following April 15. If the amount withheld is greater than the tax you owe, they refund the difference to you. If the amount withheld is less than the actual tax, you must pay the balance when you file your return. Like much of the U.S. tax code, this law can be confusing and open to some interpretation.

Please review the information on this page, but always consult a specialist if you have any doubts. The multilingual Certified Public Accountants at Miller & Company, LLP are a part of the top-rated accounting firm with offices in New York City, Washington DC and Sarasota, FL.

Their international specialists are available to provide expert assistance to you, so you can take advantage of any possible FIRPTA exceptions or exemptions. It’s worth your while to consult with a tax expert.

A Foreign National under FIRPTA

FIRPTA considers anyone who is not a U.S. citizen or legal resident to be a foreign individual. The law requires that resident aliens fulfill at least one of three criteria:

  1.  You must have lived within the United States as a lawful permanent resident during the year of your sale, and you must have a permanent resident green card to be lawful and permanent.
  2. You must pass a substantial presence test. The IRS uses a rather complex formula to determine whether your stay was substantial. During the year of the sale, you must have resided in the United States for a minimum of 31 days, as well as resided in the country for not less than 183 days over the past three years, inclusive. But while you get full credit for the days during the current year, the IRS only gives you credit for only one-third of the days you were present the year before the sale and one-sixth of the days for the year before that.
  3. You may qualify as a U.S. person if you meet the requirements to make a first-year election. The IRS uses another formula for this, which your tax accountant can explain in full.

If you meet any of these requirements, you are entitled to an exemption of the withholding of the FIRPTA tax. To clarify exceptions visit our Sarasota CPA company.

Other FIRPTA Tax Exceptions

Fortunately, even if you can’t qualify as a resident alien, you may be eligible for other FIRPTA exemptions. For example, you’re entitled to a withholding exemption if the value of the property you sell is less than $300,000, and the buyer (family included) intends to live in the dwelling at least 50 percent of the time that it’s occupied for the 12 months after the sale. Anytime the property is unoccupied, that’s excluded from the calculation.

Vacant lots are not eligible for this FIRPTA exception, even if the buyer intends to build a house on it. Also, you must sell to an individual. A sale to a corporation, partnership, estate or trust invalidates this FIRPTA exemption.

Property Sale Exemption Details

To better understand the property sale FIRPTA exemption, here’s an example.

Say you sold a house in the U.S. for $275,000. If the buyer or his family only intends to spend three months in the property and rents it out for two months, you still qualify for the exemption as long as it remains empty for the other seven months. The buyer must swear in an affidavit that, under penalty of perjury, he intends to maintain this ratio for at least the first two years of ownership. While this does provide a FIRPTA exclusion, you still have to file a return and pay any required tax.

If the sale price exceeds $300,000, the intention of the buyer is irrelevant. The withholding tax is mandatory even if you’re selling at a loss. Before February 16, 2016, the withholding rate was 10 percent. The IRS still allows this rate if the value of the property is less than $1 million, as long as the buyer intends to live there.

Caveats to FIRPTA Rules

If you can document to the IRS that your sale does not justify the normal 15 percent withholding, you may be eligible for another FIRPTA exclusion. For instance, if your sale price is less than your purchase price, you may submit an application to the IRS demonstrating your financial loss. But you must submit it before the closing date.

The IRS usually responds to these requests within 90 days. If you haven’t received a response prior to closing, the closing agent may place the withholding amount in escrow until you receive the withholding certificate or the 20-day limit has expired.

Unfortunately, even if you’ve made a short sale, where the proceeds won’t cover the rest of your mortgage, you’re still liable for withholding unless you meet any of the other FIRPTA exemptions.

The FIRPTA tax presents both challenges and opportunities to foreign nationals. The U.S. tax code is complex and nuanced, and it requires a skilled Sarasota tax accountant to guide you. Contact the top-rated accountants at Miller & Company, LLP to speak with their multilingual staff. Since 1997, they’ve been providing the very best tax consulting and accounting services possible.

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