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The Essential Guide for Foreign Buyers, Sellers, and FIRPTA-Related Real Estate Transactions

Updated: Jul 10, 2023

The Foreign Investment in Real Property Tax Act (FIRPTA) was implemented in 1980 to prevent foreign buyers from avoiding paying taxes on specific investments. If you're a foreign national considering buying or selling a property in Miami, it's crucial to understand FIRPTA and its implications. In this article, we will explore the critical aspects of FIRPTA, including who is subjected to it, common exemptions, and the process of paying the FIRPTA tax.


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In this article:


What is FIRPTA?

The Foreign Investment in Real Property Tax Act (FIRPTA) is a significant tax legislation that was enacted by the United States Congress in 1980. Its primary objective is to prevent foreign buyers from evading taxes on certain types of real estate investments in the United States. The tax is 15% of the purchase price and is withheld when the foreign buyer goes to sell the property.


Before FIRPTA, foreign investors could sell U.S. real property interests without facing the same tax obligations as U.S. citizens and residents. This created concerns about tax avoidance and revenue loss for the U.S. government. To address this issue, FIRPTA was introduced to ensure that foreign buyers contribute their fair share of taxes when investing in U.S. real estate.


FIRPTA aims to create a level playing field by subjecting foreign sellers to similar tax obligations as U.S. citizens and residents. It helps maintain tax equity and the integrity of the U.S. tax system by preventing foreign investors from exploiting the real estate market solely for tax avoidance purposes.


Since its implementation, FIRPTA has undergone amendments to strengthen its provisions and address potential loopholes. It plays a crucial role in safeguarding the U.S. tax base and preventing revenue losses associated with foreign investment in real estate.

For foreign buyers and sellers, navigating FIRPTA is essential in real estate transactions involving U.S. properties.


Understanding the intricacies of this legislation and seeking professional advice can ensure compliance with tax regulations and avoid any legal or financial complications during the buying or selling process.



Who is subjected to FIRPTA?

The Foreign Investment in Real Property Tax Act (FIRPTA) applies to foreign buyers who later sell a property considered a "U.S. real property interest." If you are a foreign buyer considering purchasing real estate in the United States, it is crucial to understand whether FIRPTA will apply to you.


Under FIRPTA, a foreign seller is subject to the act's provisions and tax obligations when selling specific U.S. real property interests. These interests typically include:

  1. Residential Properties: If you, as a foreign buyer, own residential property in the United States and decide to sell it, FIRPTA may apply to your transaction. This includes single-family homes, townhouses, condominiums, and apartments.

  2. Commercial Properties: FIRPTA also encompasses commercial real estate, such as office buildings, retail spaces, industrial properties, and vacant land.

  3. Rental Properties: If you own a property in the United States that generates rental income, FIRPTA may apply when you sell it. However, there are exemptions for rental income under certain conditions, such as the "active participation" exemption mentioned earlier.

It's important to note that FIRPTA applies to individual foreign sellers and foreign entities selling U.S. real property interests. The act's provisions and tax obligations still apply whether you are a foreign individual or a foreign corporation.


Common exemptions for FIRPTA

There are some exemptions of the FIRTPA tax; you can check out the complete list on the IRS website. The main exemptions for FIRPTA are as follows:

  • Passive income such as rental income is allowed as long as the property owner is not considered an "active participant," which means they live at least 183 days out of each tax year or more than 10% of their gross receipts come from active participation involving the asset like if they manage it themselves or provide professional services to the property's tenant(s).

  • Personal residences are exempt under FIRPTA since they are not considered an "investment property." You may not be required to report your personal residence's sale under FIRPTA if you are not claiming any capital gains from the sale.


What to Know If You're a Foreign Buyer?

If you're a foreign buyer considering purchasing real estate in the United States, you must know FIRPTA and its implications. Here are a few key points to keep in mind:

  1. Understand FIRPTA Requirements: Familiarize yourself with the provisions of FIRPTA to ensure compliance. If you plan to sell the property, you may be subject to FIRPTA tax obligations.

  2. Seek Professional Guidance: Engage the services of a qualified CPA or real estate attorney who specializes in FIRPTA matters. They can guide the buying process, help you understand FIRPTA's impact on your investment, and assist in navigating the associated tax obligations.

  3. Plan for Withholding: As a buyer, you may be responsible for withholding a portion of the purchase price and remitting it to the IRS on behalf of the foreign seller. Be prepared for this obligation and ensure the necessary steps are taken to comply with FIRPTA withholding requirements.



What to Know If You're a Foreign Seller?

If you're a foreign seller of U.S. real estate, understanding FIRPTA is essential to ensure a smooth transaction. Consider the following:

  1. Consult with Professionals: Engage the services of a CPA or real estate attorney experienced in FIRPTA matters. They can guide you through the process, help you determine your tax obligations, and assist with the required documentation. The tax forms will have to be submitted by a tax professional.

  2. Plan for Withholding: Understand that as a foreign seller, your buyer may be responsible for withholding a portion of the purchase price and remitting it to the IRS. Discuss this matter with your CPA or real estate attorney to ensure compliance and proper withholding procedures.

  3. File Form 8288-A: To avoid FIRPTA tax withholding, you must file Form 8288-A, which provides specific information about the transaction and certifies your eligibility for an exemption. Ensure that this form is completed accurately and submitted within the required timeframe to the withholding agent.


What to Expect When Buying a Property Subjected to FIRPTA

If you're considering purchasing a property subject to FIRPTA, it's essential to understand what to expect during the buying process. Here are key points to keep in mind:

  1. FIRPTA Withholding: As a buyer, you may be responsible for withholding a portion of the purchase price and remitting it to the IRS on behalf of the foreign seller. The withholding amount is typically 15% of the gross sale price. Ensure you work with a knowledgeable settlement agent or real estate attorney who can guide you through the FIRPTA withholding requirements and ensure compliance.

  2. Consult with Professionals: Engage the services of a CPA or real estate attorney experienced in FIRPTA matters. They can help you understand your obligations as a buyer and guide you through the withholding process. They will also assist in completing the necessary forms and ensuring timely remittance to the IRS.

  3. Secure Funds for Withholding: As a buyer, you must ensure sufficient funds are available to fulfill your FIRPTA withholding obligation. Before the closing, work with your settlement agent or attorney to determine the exact withholding amount and make the necessary arrangements to have those funds available.

  4. Understand Seller's Compliance: It's essential to confirm that the seller complies with FIRPTA requirements. Request documentation, such as Form 8288-A, from the seller to verify that they have filed the necessary forms with the IRS. This will help ensure you are not held responsible for unfulfilled tax obligations.

  5. Timeframe Considerations: Be aware that FIRPTA has specific deadlines that must be met. The buyer and seller must adhere to these deadlines to avoid potential penalties. Work closely with your settlement agent or attorney to ensure that all required forms and payments are submitted within the designated timeframe.


The Process of Withholding and Paying the FIRPTA Tax Amount

Withholding and paying the FIRPTA tax is relatively straightforward, involving several key steps. Here's an expanded overview of the process:

  1. Determining the Withholding Amount: As the buyer or the buyer's settlement agent, you are responsible for calculating and withholding the FIRPTA tax from the gross sale price of the property. The withholding amount is typically 15% of the sale price, unless an exemption applies.

  2. Completing Form 8288: As the withholding agent, you must complete Form 8288, "U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests." This form is used to report the withholding and submit it to the IRS. It includes information such as the buyer and seller's details, the property information, and the amount withheld.

  3. Obtaining Form 8288-A: The foreign seller must provide you, the withholding agent, with Form 8288-A, "Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests." This form certifies the seller's eligibility for a reduced or exempt withholding rate, such as a reduced tax treaty rate. The seller must complete and submit this form within 30 days of the property sale.

  4. Remitting the Withheld Amount: Once Form 8288 and Form 8288-A (if applicable) are completed and filed, you, as the withholding agent, are responsible for remitting the withheld amount to the IRS. This should be done promptly to ensure compliance with the FIRPTA regulations.

  5. IRS Review and Refunds: The IRS will review all the documents and information provided, including Form 8288 and Form 8288-A, to determine if the withholding amount is accurate and if a refund is owed to the foreign seller. If the amount withheld exceeds the seller's actual tax liability, a refund may be issued.

The time it takes for the IRS to process the withheld amount and make a determination regarding a refund can vary. It is advisable to consult with a tax professional or review the IRS guidelines to understand the current processing times.


It's important to note that the responsibility for withholding and remitting the FIRPTA tax lies with the buyer or the buyer's settlement agent. As a foreign seller, ensure that you provide all necessary documentation, such as Form 8288-A, to the withholding agent in a timely manner to avoid unnecessary delays or complications in the process.


Role of Realtors in FIRPTA Transactions

Realtors play a crucial role when it comes to FIRPTA transactions. While they are not directly responsible for the withholding and remittance of the FIRPTA tax, they provide valuable assistance and guidance to both buyers and sellers throughout the process. Here's how realtors can support clients in FIRPTA transactions:

  1. Knowledge and Education: Realtors who are well-versed in FIRPTA regulations can educate their clients about the implications and requirements of FIRPTA. They can explain how FIRPTA may impact the buying or selling process, ensuring that clients have a clear understanding of their obligations and potential exemptions.

  2. Referral to Professionals: Realtors can refer their clients to qualified professionals, such as certified public accountants (CPAs) or real estate attorneys, who specialize in FIRPTA matters. These professionals can provide expert advice on compliance, tax obligations, and necessary documentation.

  3. Transaction Coordination: Realtors can facilitate communication and coordination between buyers, sellers, and other involved parties, such as settlement agents or attorneys. They can ensure that all required forms, such as Form 8288 and Form 8288-A, are completed accurately and submitted within the specified timeframes.

  4. Compliance Checks: Realtors can help buyers and sellers verify the compliance of the other party regarding FIRPTA requirements. They can request relevant documentation, such as Form 8288-A, from the seller to ensure that FIRPTA withholding obligations are being met.

  5. Support and Resources: Realtors can offer support and provide resources to their clients, such as links to official IRS guidelines or additional information on FIRPTA. They can also address any questions or concerns their clients may have throughout the transaction process.


While realtors are not tax professionals and cannot provide direct tax advice, their knowledge and assistance in FIRPTA transactions can help facilitate smoother and more informed real estate transactions for foreign buyers and sellers. Collaborating with a knowledgeable realtor can help ensure compliance with FIRPTA regulations and contribute to a successful transaction experience.


Conclusion

Many foreign buyers are unaware of FIRPTA when buying property in Miami and don't find out until they are nearing the close of their home sale. Understanding FIRPTA is essential for foreign buyers and sellers engaging in U.S. real estate transactions, particularly in locations like Miami. By getting familiar with FIRPTA requirements, seeking professional guidance, and complying with the withholding obligations, foreign buyers and sellers can navigate the process smoothly. Working with experts in FIRPTA matters ensures compliance with tax regulations and promotes a secure and transparent real estate market. Overall, being informed about FIRPTA empowers foreign investors to make informed decisions, contribute to the U.S. tax system, and participate confidently in the Miami real estate market.



Frequently Asked Questions about FIRPTA


What is FIRPTA?

FIRPTA stands for the Foreign Investment in Real Property Tax Act. A U.S. tax law imposes tax obligations on foreign sellers of certain types of U.S. real property interests.


How much is the FIRPTA tax?

The FIRPTA tax is typically 15% of the gross sale price of the property. This amount is withheld by the buyer or their settlement agent and remitted to the IRS on behalf of the foreign seller.

Are there any exemptions to FIRPTA?

Yes, there are exemptions available under FIRPTA. For example, personal residences are generally exempt from FIRPTA if specific criteria are met. Additionally, there are exemptions for certain types of transactions and specific property values. It is advisable to consult with a CPA or real estate attorney to determine if you qualify for any exemptions.


What is the buyer's role in FIRPTA compliance?

As a buyer, you are responsible for withholding the FIRPTA tax from the foreign seller's proceeds and remitting it to the IRS. Working with a knowledgeable settlement agent or attorney who can guide you through the FIRPTA withholding requirements and ensure compliance is crucial.

How can I determine if FIRPTA applies to my sale as a foreign seller?

To determine if FIRPTA applies to your sale, consult a CPA or real estate attorney experienced in FIRPTA matters. They can assess your situation, review the nature of your property, and guide you on your tax obligations.


What forms are involved in FIRPTA compliance?

The main form associated with FIRPTA compliance is Form 8288, "U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests." Form 8288-A, "Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests," is required to report the withholding to the IRS.


Can I get a refund of the FIRPTA tax withheld?

It is possible to apply for a refund if the amount withheld exceeds your actual tax liability. You must file a U.S. tax return, such as Form 1040NR, to claim a refund.


What are the consequences of non-compliance with FIRPTA?

Non-compliance with FIRPTA can result in penalties and interest charges. Ensuring proper compliance is essential to avoid legal or financial repercussions.


Should I seek professional advice for FIRPTA compliance?

Consulting with a qualified CPA or real estate attorney specializing in FIRPTA matters is highly recommended. They can guide your situation, help you navigate the requirements, and ensure compliance with FIRPTA regulations.


What if I'm selling my property at a loss?

Foreign sellers who sell their property at a loss may still be subject to FIRPTA tax. If the amount withheld exceeds their actual tax liability, they can file a U.S. tax return and get a refund. It's best to consult a CPA or tax professional for advice on their unique situation.

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