Foreign Investment in Real Property Tax Act of 1980

Foreign Investment in Real Property Tax Act of 1980

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Under FIRPTA, a buyer who purchases U.S. real estate from a foreign seller is obligated to withhold from the seller’s proceeds, and submit to the IRS, a percentage of the sales price of the U.S. real property. This tax withholding is a prepayment of the foreign seller’s potential U.S. income tax liability. The foreign seller then files an income tax return reporting the transaction. A foreign seller may claim a refund, where the actual income tax liability due on the return after deductions is less than the amount of the tax withheld.

The rate of tax withholding on a foreign seller of U.S. real property is 15 percent of the sales price. There is a residential exception that reduces the required withholding rate to 10 percent of the sales price.

The first step is to determine if the seller is a foreign person

First, a determination must be made regarding if the seller is a U.S. person or a foreign person. For individuals, a “U.S. person” is defined as a citizen or resident of the U.S. A “citizen” is, generally, a person born in the U.S. A “resident” of the U.S. is an individual lawfully admitted for permanent residence; a person issued an alien registration card, or Form I-551, more commonly known as a “green card.

For tax purposes, an individual may also be deemed a resident of the U.S. for a specific calendar year if the individual meets the “substantial presence” test. The substantial presence test can be met if the individual is physically present in the U.S. for enough days to meet the following strange substantial presence calculation.

The substantial presence calculation takes the number of days the individual is in the U.S. and applies the following formula. Divide the days spent in the U.S. during the previous calendar year by three. Divide the days spent in the U.S. during the year before the previous calendar year by six. Add these two amounts to the number of days spent in the U.S. during the current calendar year (must at least 31 days). The result must be at least 183 to meet the substantial presence test. (I am not making this up!)

If meeting the substantial presence test is how the seller gets exempted from the tax withholding, evidence of seller’s presence in the U.S. must be documented. The U.S. Customs and Border Protection website has a function that allows individuals to access their most current five-year arrival and departure history.

Exceptions to FIRPTA Withholding

If it is determined that the seller is a foreign person there is one tax exemption and one tax reduction the seller may qualify for.

The first step in qualifying for either the exemption or the reduction is to determine if the real property being sold is a residential and not a commercial property. Commercial property does not qualify for either the exemption or reduction in withholding tax.

Secondly, the buyer must be an individual.

Next, the buyer must be purchasing the property for personal use as a (doesn’t have to be a primary residence) residence. Real property is acquired for use as a “residence” if on the date of the transfer the buyer has definite plans to reside at the real property for at least 50 percent of the number of days that the real property is used by any person during each of the first two 12-month periods following the date of the transfer. In English, this means the buyer plans on using it personally as much or more than the buyer plans on renting it out. It is recommended that the buyer sign an affidavit acknowledging the residence requirement.

If the preceding requirements are met, the next issue is the sales price. If the sales price is $300,000 or less, then tax withholding is not required. If the sales price is equal to or greater than $300,001, but equal to or less than $1 million then the seller would qualify for a reduced withholding of 10 percent. If the sales price is greater than $1 million, then no exception applies, and the buyer is responsible for withholding 15 percent of the amount realized by seller.

 

First, a determination must be made regarding if the seller is a U.S. person or a foreign person. For individuals, a “U.S. person” is defined as a citizen or resident of the U.S. A “citizen” is, generally, a person born in the U.S. A “resident” of the U.S. is an individual lawfully admitted for permanent residence; a person issued an alien registration card, or Form I-551, more commonly known as a “green card.

 

For tax purposes, an individual may also be deemed a resident of the U.S. for a specific calendar year if the individual meets the “substantial presence” test. The substantial presence test can be met if the individual is physically present in the U.S. for enough days to meet the following  strange substantial presence calculation.

 

The substantial presence calculation takes the number of days the individual is in the U.S. and applies the following formula. Divide the days spent in the U.S. during the previous calendar year by three. Divide the days spent in the U.S. during the year before the previous calendar year by six. Add these two amounts to the number of days spent in the U.S. during the current calendar year (must at least 31 days). The result must be at least 183 to meet the substantial presence test. (I am not making this up!)

 

If meeting the substantial presence test is how the seller gets exempted from the tax withholding, evidence of seller’s presence in the U.S. must be documented.  The U.S. Customs and Border Protection website has a function that allows individuals to access their most current five-year arrival and departure history.

 

Exceptions to FIRPTA Withholding

If it is determined that the seller is a foreign person there is one tax exemption and one tax reduction the seller may qualify for.

 

The first step in qualifying for either the exemption or the reduction is to determine if the real property being sold is a residential and not a commercial property.  Commercial property does not qualify for either the exemption or reduction in withholding tax.

 

Secondly, the buyer must be an individual.

 

Next, the buyer must be purchasing the property for personal use as a (doesn’t have to be a primary residence) residence. Real property is acquired for use as a “residence” if on the date of the transfer the buyer has definite plans to reside at the real property for at least 50 percent of the number of days that the real property is used by any person during each of the first two 12-month periods following the date of the transfer. In English, this means the buyer plans on using it personally as much or more than the buyer plans on renting it out. It is recommended that the buyer sign an affidavit acknowledging the residence requirement.

 

If the preceding requirements are met, the next issue is the sales price. If the sales price is $300,000 or less, then tax withholding is not required. If the sales price is equal to or greater than $300,001, but equal to or less than $1 million then the seller would qualify for a reduced withholding of 10 percent. If the sales price is greater than $1 million, then no exception applies, and the buyer is responsible for withholding 15 percent of the amount realized by seller.