ADVISING NON-US RESIDENTS ON REAL ESTATE SALES AND THE WITHOLDING TAX – FIRPTA
Davis & Associates CPA’s has extensive experience assisting individuals with international finance concerns. We’ve helped residents with foreign assets and non-US residents with their US finances and tax obligations. One of the most complex situations for non-residents is the sale of their US real property.
The Foreign Investment in Real Property Tax Act – FIRPTA – is an intricate installment in US policy that is designed to enforce tax payment from non-resident real estate sellers. Our firm will team up with the non-residents, their real estate agent and title company to ensure tax compliance and streamline the property sale. We highly recommend working with a tax expert to ensure accurate tax payment.
WHAT DO NON-RESIDENTS NEED TO CONSIDER?
Non-us real estate sellers have a tax liability that differs from US residents. These tax costs can significantly affect the return on investment for properties in the U.S.
FIRPTA is a Withholding tax on US property sales, which includes commercial and residential property, if the seller is a non-resident or a non-US corporation. The Withholding tax rate is currently set to 15 percent of the selling price of the property. Upon closing the title company is withholding the tax and needs to remit the tax to the IRS no later than the 20th day after closing. This tax has two purposes, to cover a potential capital gain tax and protect the non-resident from accidentally dodging tax policy.
For non-compliance with this Withholding tax procedure there are significant penalties to the seller, title company and the buyer of the property.
To make sure that all tax forms are filed correctly and the tax payment is applied accordingly it is required that the sellers have a US taxpayer ID number (ITIN) or will apply for an ITIN. Our company acceptance agents will take care of this process to obtain an ITIN for you. In addition, if the purchaser of the property is a non-resident it is highly recommended that they apply for an ITIN as well.
POTENTIAL EXEMPTIONS OR REDUCTIONS OF THE WITHHOLDING TAX
Non-residents can minimize the Withholding tax in a few different ways, including:
Buyer’s Affidavit or personal use affidavit: Provided the property sold for $300,000 or less and the buyer is signing a buyer’s affidavit, the Withholding tax will be reduced to ZERO. For a selling price up to $1 Million with the buyer is signing the affidavit, the Withholding tax will be reduced to 10%. The buyer’s affidavit, however comes with certain conditions.
With the application for a Withholding Certificate the tax payable to the IRS will be reduced to the actual tax due on the capital gain, or, if the property sold with a loss the tax will be reduced to zero. The application for Withholding Certificate needs to be filed with the tax agency on or before the date of closing.
To partner with an expert CPA firm that understands international tax obligations, contact Davis & Associates CPA’s. Our professionals offer assistance with FIRPTA regulations, non-resident finances and much more.