The Foreign Investment in Real Property Tax Act, better known as FIRPTA, 26 U.S.C. § 1445, provides that a buyer must withhold 10% of the amount realized by the foreign seller in the sale of an interest in U.S. real property. If the seller is a foreign person and the buyer fails to withhold, the buyer may be held liable for the tax.
My seller is a resident alien, does that mean FIRPTA applies?
A resident alien, for purposes of FIRPTA, is not a foreign person. FIRPTA defines a foreign seller as a non-resident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust or estate. There are two ways to determine if a person qualifies as a resident alien under FIRPTA:
- 1. If a person has been issued an alien registration card (“green card”) or
- 2. The substantial presence test that requires a person be physically present in the United States for a certain number of days a year. 183 days (pursuant to IRS Code).
My seller does not have a green card. What qualifies under the substantial presence test?
The short answer is that if your seller was physically present in the United States for at least 183 days in the previous calendar year, he or she qualifies as a resident alien and is not subject to FIRPTA withholding. Even if the seller does not meet this requirement, he or she might still be exempt from FIRPTA, by using the complicated formula found in IRS Code § 7701 that states that a seller qualifies as a resident alien if
- 1. The seller was present in the United States on at least 31 days during the calendar year, and
- 2. (the number of days present in current year) + (the number of days present in preceding year x 1/3) + (the number of days present in 2nd preceding year x 1/6) equals or is greater than 183.
How do you determine the amount realized for FIRPTA?
The amount realized typically is the sales or contract price. Please note that the outstanding amount of any liability assumed by the buyer does not reduce the amount realized. If the property is owned jointly by foreign and non-foreign persons, the amount realized is to be allocated among the owner based on capital contributions, with spouses treated as having contributed 50% each. Generally, the amount to withhold is 10% of the amount realized, unless the seller is a corporation, partnership, trust, or estate in which case the amount may be 35%.
I am buying a house from a foreign person as defined by FIRPTA, what do I need to do now?
Generally, these forms need to filed with the IRS within 20 days of the date of transfer, defined as the date consideration is first paid, excluding earnest money or deposits. Failure of the buyer to withhold the proper amount may cause the buyer to be liable for the payment of the tax plus penalties and interest as well as possibly making the buyer subject to criminal penalties.
Even though the seller is a foreign national, are there any exceptions to the withholding?
Several exceptions do apply and exempt the buyer from withholding. Here is a partial list of the most common exceptions in a real property transfer:
- 1. The property is purchased for $300,000.00 or less and is to be used by the buyer as his or her residence. The test for a residence is if the buyer is to reside in the property for at least 50% of the days in the next two 12 month periods.
- 2. The seller provides to the buyer a Non-Foreign Status Certification containing the transferor’s U.S. taxpayer identification number and stating that the transferor is not a foreign person. The buyer need not investigate the validity of the certification, but will be held liable if he or she has actual knowledge that it is false.
- 3. The seller provides to the buyer a withholding certificate from the IRS that excuses or lowers the withholding amount.
- 4. No consideration is paid (for example the property was transferred as a gift).
- 5. An option to acquire real property is signed (however, withholding is required on the sale when the option is exercised).
- 6. The purchaser is the United States, a U.S. state or possession or political subdivision, or the District of Columbia.
- 7. The seller provides a notice signed under penalties of perjury stating that the seller is not required to recognize gain or loss on the transfer because of a nonrecognition provision of the Internal Revenue Code or a provision in a U.S. tax treaty.
Where can I get more information on FIRPTA?
We would be glad to answer any questions that you might have on FIRPTA, but additional information, applicable forms, the withholding certificate application process, and more, can be found at www.irs.gov.