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The basics of FIRPTA withholding tax


When getting prepared for settlement, one of the concerns of every settlement company is whether the seller is affected by the Foreign Investment Real Property Tax Act (FIRPTA). In fact, all settlement companies will require the seller to sign an affidavit stating they are not subject to FIRPTA.

If the seller cannot or will not sign the affidavit, then 10% of the sales price is collected at settlement and paid directly to the IRS by the settlement company.

The rules of FIRTPA changed February 16, 2016 when the withholding rate on properties over $1 million increased to 15%. Read our coverage of the increase of FIRPTA withholding to learn more.

The following are some commonly asked questions with some basic answers.

When is your client affected by FIRTA?

When the property sales price over $300,000 and your client is a foreign person i.e. does not participate in the US tax system.

What does my client need to do?

Apply for an exemption by filing an IRS Form 8288 on or before date of settlement OR pay 10% of the sales price directly to the IRS via the closing agent.

NOTE: If your client does not have a tax identification or social security number, then your client will also be required to file a W-7 form at the time of either filing for an exemption or paying the tax.

How is my purchaser affected by FIRPTA?

If the seller is foreign and does not pay the requisite tax or file for exemption; then your purchaser is on the hook for paying the tax.

NOTE: If both the seller and the purchaser are foreign, your purchaser will be required to file a W-7 form if your purchaser does not already have a tax identification or social security number. Your purchaser’s tax identification number must be on the seller’s form whether filing for exemption or filing to pay the tax.

Can any of the paperwork be filed in advance?

Yes, the requisite forms can be filed as soon as you have a ratified contract. You will need to get the purchaser’s information i.e. SSN, address, etc., in order to do so.

How long does it usually take the IRS to grant an exemption or give a decision as to the exemption?

Typically it takes 90 days to receive a certificate of exemption, partial exemption or non-exemption.

Who usually files the requisite forms?

  1. If the seller is paying 10% of the sales price as part of settlement, then the settlement agent/attorney will file the forms and pay the money directly to the IRS.
  2. If the seller wishes to file for an exemption, then the seller hires the settlement agent, a tax attorney or an accountant to file the forms. There is usually an additional fee to handle the exemption filings.

If you need any further information or need the forms, visit IRS webpage on foreign persons or contact our office.