13 Thing First Time Home Buyers Should Know About Foreign Investment in Real Property Tax Act (FIRPTA)
FIRPTA is a tax law that imposes income tax on foreign persons selling U.S. real estate.
Foreign persons who dispose of U.S. real property interest must treat any gain or loss from the transaction as gain or loss were income effectively connected with a U.S. trade or business.
This law affect real property located in the United States and the Virgin Islands.
Real property includes mines, wells and other natural deposits.
The amount of FIRPTA withholding is dependent on a variety of factors but is typically 10% - 15%.
The buyer, not the seller, is responsible for collecting and for making sure the IRS is paid the appropriate amount of tax.
In most cases, the buyer must complete IRS Forms 8288 and 8288-A, to enter the amount subject to 10% or 15% withholding.
If the buyer fails to withhold the required amount, the buyer may be held liable for the taxes.
The IRS defines a foreign seller as a non-resident alien individual.
If a seller holds a U.S. citizenship or a permanent resident card, that person is typically exempt from FIRPTA withholding.
An international tax identification number (ITIN) has nothing to do with whether a seller is a foreign person or U.S. person. These numbers are issues by the IRS to help individuals comply with U.S. tax laws and to process tax returns for individuals that are ineligible for Social Security numbers. They serve no other purpose.
If an individual is neither a U.S. citizen nor a permanent resident, the buyer can use the substantial presence test to determine where the person in question spends their time.
If necessary, a buyer can also file a FIRPTA affidavit, to attest the seller’s non-foreign status.
While your Real Estate Agent or Broker can assist by way of providing the seller with a list of CPAs or attorneys who are familiar with FIRPTA, it is typically outside the scope of their license to determine whether or not a seller has a tax obligation under FIRPTA. For more information, please visit FIRPTA withholding at irs.gov
As always, we thank you for stopping by. Until next time…Diana
Source: Texas Association of Realtors
Source: Internal Revenue Service
Image by Diana for First Home Houston
