Do you know what the Foreign Investment in Real Estate Tax Act (FIRPTA) is?
This is a law that affects any nonresident alien individual and foreign companies not considered domestic corporations. From a tax standpoint, when a non-resident person or a foreign corporation or partnership sells property within the United States, it will be subject to the provisions of FIRPTA.
How does it affect me?
At the final moment of the transaction, the seller will be charged a 10% retention on the sale price, in transactions below $1,000,000 and 15% if the sale price is above $1,000,000.
An example could be, a “foreign investor” sells property for US$350,000, the closing agent of the transaction (company or lawyer that processes the title) will retain US$35,000 in a special account called “escrow”, until the “investor Foreign” file your income tax return in January of the calendar year following the closing of the sale.
Is it possible to avoid this retention?
It is very important to give adequate attention and planning to this point, in this way there will be no unpleasant surprises at the closing.
Buying in a personal name or in 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 also the internal constitution that could make the difference. On the other hand, FIRPTA is only one of the factors to take into account, therefore, it is extremely important to know the advantages and disadvantages of the different purchase structures (LLC, S-Corp, Trust, Inc, etc).
If I am a buyer, does it affect me?
The answer to this question is yes. As a buyer you must ensure that the withholding is made in the event that the seller is a “non-resident foreign individual or foreign company not considered a national corporation” otherwise you could 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 certified public accountant who can fill out the appropriate applications and obtain the individual (ITIN). The ITIN is a number assigned by the IRS for those 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 the time of closing.
After submitting the applications and forms to the Internal Revenue Service (IRS), the application process can take a maximum of approximately 90 days.
LEGAL NOTE: The provisions of FIRPTA are complicated and require the advice of a professional real estate attorney or CPA who can complete the proper applications and assess potential threats. This information has not been created with the intention of replacing the role of professional advice.
Contact a professional!