Domestic real estate transactions can be stressful enough as is. For non-citizens selling real property in the United States, the stress can be magnified considerably. One of the biggest contributors to this stress is FIRPTA withholdings. As with any rule of the U.S. tax code, FIRPTA is complicated, and can be confusing. But by familiarizing yourself with the basics of this tax law, you can greatly reduce the confusion, stress, and potentially, the amount of money you’ll owe on your sale.
What is FIRPTA?
Understanding FIRPTA stands for Foreign Investment in Real Property Tax Act of 1980. This tax law was enacted to impose income tax on foreigners selling a United States real property interest (USRPI). Under FIRPTA, the IRS will withhold 15% of the seller’s earnings until the seller pays capital gains taxes.
The Withholding Process
While FIRPTA withholdings are the seller’s financial burden to bear, the burden of responsibility to withhold the funds rests on the buyer’s shoulders. When the sale of a foreigner’s USRPI is finalized, the buyer is responsible for withholding the 15% of the gross sales price. After the closing date, the buyer generally has 20 days to send the withholdings, along with Forms 8288 and 8288-A, to the Internal Revenue Service.
If no profit was made on the sale, or if the amount of tax owed on the sale is estimated to be less than the 15% withholding, sellers can apply for reduced withholding by submitting IRS Form 8288-B by, or prior to, the closing date. If the application for reduced withholding is still pending at the time of closing, the buyer must still withhold the 15%, but does not have to forward it (or whatever amount it has been reduced to) until after the exemption or denial is received in the mail, after which the buyer has 20 days to comply.
The Limited Liability Loophole
A popular and reliable strategy employed by many foreigners dealing in USRPI is to purchase the property as a corporate entity, most commonly, an LLC. Under United States tax law, when a U.S.-formed LLC sells real property, FIRPTA withholdings may be kept in the company’s (seller’s) possession.
As Orlando’s most experienced, most trusted real estate service for foreign investors, the Authentic Real Estate Team understands the questions and concerns that foreigners bring to their transactions. We know that FIRPTA withholdings are just one of the many foreboding factors that non-citizen investors face when dealing in United States real property. But armed with our expert advice, these valued contributors to Orlando’s economy have gained a solid foothold in the Central Florida real estate scene, even if they’ve never stepped foot on Central Florida soil. Let us show you how you can cash in on the magic of Orlando real estate, no matter where in the world you live.