FIRPTA Exemption

firpta exemption

What are the exemptions to FIRPTA?
If property is owned by a US Citizen or Resident Alien (green card holder) there is no FIRPTA withholding required.

If seller is a foreign person there can be an exemption to FIRPTA withholding, but the transaction must qualify. If seller believes they are entitled to an exemption, they should contact their tax attorney or CPA immediately before considering selling property. The exemption process can be lengthy and very specific documentation must be provided to the IRS before seller learns if they have been approved for an exemption.

What if seller believes they qualify for a FIRPTA exemption?
If seller believes they do not have any tax liability, they may be able to obtain an exemption. One example would be if they purchased the property at a higher price and now have a capital loss on the property. In order to obtain an exemption, they would complete IRS form 8288B (application for Exemption/Withholding Certificate). This form can be submitted by the seller prior to closing or at closing to the title company so it can be sent to the IRS. If seller is simultaneously applying for an ITIN, these forms should be sent together.
The escrow company will still keep 15% withholding tax in escrow pending receipt of the Exemption Certificate. The IRS can issue a Withholding Certificate specifying that no withholding is required or a reduced amount of withholding is necessary. This may arise when the taxes due on the seller’s gain will be less than 15% of the sales price.

What if seller does not have an ITIN (Individual Tax Identification Number)?
If seller does not have an ITIN they must obtain one by completing IRS form W-7 (application for ITIN). It can be completed and sent with the withholding funds at closing.

What if buyer does not have an ITIN?
If buyer does not have an ITIN they must obtain one by completing IRS form W-7 (application for ITIN). Since buyer is responsible for collecting withholding funds from seller and remitting this to IRS, buyer needs to have their own ITIN to complete the forms.

NO FIRPTA WITHHOLDING TAX IS REQUIRED IF:
1. sales price of property is under $300,000 and
2. buyer to occupy property as their primary residence
(buyer or a member of their family has definite plans to reside in property for at least 50% of the number of days the property is used during each of the first two years following the date of purchase)

For a FIRPTA exemption if seller is a foreign person, answers to both questions must be YES.

When to file:
If all documents are completed and buyer has withheld 15% of sale price from seller, buyer must file form 8288 and transmit tax withheld to IRS by 20th day after date of purchase.
Failure to provide complete and necessary forms could cause penalties and interest to accrue against buyer.

Where to file:
Send form 8288 and amount withheld to:
IRS – FIRPTA Division
PO Box 409101
Ogden, UT 84409

Always check www.irs.gov before sending any forms to have current form version and current mailing address for IRS.

Are there penalties for failure to withhold?
Penalty starts with a $10,000 fine for failure to collect tax and file forms on time. There can be additional interest and penalties added to that.

How can seller obtain a withholding certificate?
Buyer or seller may apply for a withholding certificate. Normally it will be seller’s responsibility to obtain withholding certificate and provide it to buyer to avoid withholding.
The IRS generally acts on a withholding certificate request (form 8288-B) within 90 days after receipt of request so this should be obtained as soon as seller decides to sell the property.

Can escrow be closed by holding 15% from seller’s proceeds while seller obtains withholding certificate?
If buyer and seller specifically instruct that buyer will hold funds from seller and permit seller time to apply for withholding, this should be done only after consultation with buyer’s and seller’s tax attorney or CPA.

More FIRPTA info at IRS website.

FIRPTA

Arizona FIRPTA IRS
With so many foreign owners of homes in Phoenix, it is vital that all buyers understand the tax consequences of purchasing a home from a foreign seller. A Canadian homeowner selling their Phoenix property is considered a foreign seller.

Simply put, the Foreign Investment in Real Property Tax Act (FIRPTA) authorizes the United States to tax foreign persons selling US property.

What instructions are in the Arizona purchase contract?
The FIRPTA provision in the AZ purchase contract states “The Foreign Investment in Real Property Tax Act (“FIRPTA”) is applicable if seller is a non-resident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate (“Foreign Person”). Seller agrees to complete, sign, and deliver to Escrow Company a certificate indicating whether seller is a Foreign Person. FIRPTA requires that a foreign seller may have federal income taxes up to 15% of the purchase price withheld, unless an exception applies. Seller is responsible for obtaining independent legal and tax advice.”

Persons purchasing US real property interests from non-resident aliens are required to withhold 15% of the purchase price and remit that amount to the IRS within 20 days of the transaction. Withholding is intended to ensure US taxation of gains realized on disposition of real property interests. The buyer is the withholding agent. If you are the buyer, you must find out if the seller is a foreign person or non-resident alien. If the seller is a foreign person/non-resident alien and you fail to withhold, you may be held liable for the tax.

A non-resident alien is defined as an individual who is neither a US citizen nor a resident of the US within the meaning of the Internal Revenue Code. An alien is a resident of the US for federal income taxes if they:
1. Have been issued a green card (admitted as a Lawful Permanent Resident in the US) at any time during or prior to the calendar year OR
2. Have maintained a “substantial presence” in the US, which means the alien is physically present in the US for 183 days or more during the calendar year
If the foreign person is neither a US citizen nor falls within description (1) or (2), they are a non-resident alien and subject to FIRPTA withholding unless an exception applies.

Exceptions:
Home Use $300K Exception
Buyer is not required to withhold tax when buyer purchases real estate for use as their home and purchase price is not more than $300,000.
Withholding Certificate
Buyer or seller may request a withholding certificate and IRS will generally act on these requests within 90 days after receipt of a complete application (Form 8288-B), including Individual Taxpayer Identification Numbers (ITINs) of all parties in the transaction. Form 8288-B requires a description of real property interest being sold, sales price, calculation of maximum tax owed and evidence that seller has no unsatisfied FIRPTA withholding obligation.

Summary of FIRPTA:
• Disposition of US real property interest by a foreign person is subject to income tax withholding
• Requires 15% of sales price be withheld as tax unless an exemption applies
Buyer is responsible to report and withhold tax from foreign seller and pay it to IRS, not escrow officer or title company
• Seller can request a waiver or reduced withholding on IRS form 8288-B
• Tax withheld along with IRS forms 8288-A and 8288-B are due within 20 days of closing

Andrew Robb - RE/MAX Fine Properties, 21020 N Pima Rd, Scottsdale AZ 85255