Do you know what the Foreign Investment in Real Estate Tax Act (FIRPTA) is?
This law affects nonresident alien individuals and foreign companies not considered domestic corporations. From a tax point of view, when a person does not reside or a foreign corporation or company sells the property within the United States, it will be subject to the provisions of FIRPTA.
How does it affect me?
At the transaction’s final time, the seller will be held a 10% hold on the selling price on transactions below $1,000,000 and 15% if the selling price is above.
An example could be a “foreign investor” who sells the property for $350,000. The closing agent (company or lawyer processing the title) will hold $35,000 in a special account called an “escrow deposit” until the “foreign investor” files his income tax return in January of the year calendar following the close of the sale.
Is it possible to avoid this withholding?
It is very important to give proper attention and plan to this point; there will be no unpleasant surprises at the close.
Buying in a personal name or the name of a company is one of the most important elements in the FIRPTA application. However, it is not only the type of legal structure but the internal constitution that could make the difference. On the other hand, FIRPTA is only one of the factors to be taken into account. Therefore, it is imperative to know the advantages and disadvantages of the different purchasing structures (LLC, S-Corp, Trust, Inc, etc.).
Does it affect me if I am a buyer?
The answer to this question is yes. As a buyer, you must ensure that the withholding is made if the seller is a “nonresident foreign individual or a foreign company not considered a domestic corporation”; otherwise, you may be responsible for paying that withholding.
How do I recover the amount withheld?
In such a case, you should hire a real estate attorney or a public accountant who can fill out the appropriate applications and obtain the individual (ITIN). The ITIN is a number assigned by the IRS for individuals who do not have a social security number to see if the seller receives a portion of the withholding since the actual tax liability is not known at closing.
After submitting applications and forms to the Internal Revenue Service (IRS), the application process can take approximately 90 days.
Legal note: FIRPTA’s provisions are complicated and require the advice of a professional real estate attorney or public accountant who can fill out appropriate applications and assess potential threats. This information is not intended to replace the role of professional advice.
Contact a professional!