FIRPTA COMPLIANCE – Are you a Realtor or Real Estate Attorney who has US Non-resident Foreign-National Clients?
Do you need help with the FIRPTA Tax Form 8288-B Early Tax Withholding Exemption Certificate Application as well as help with the accompanying Form W-7 ITIN or EIN Application for an International Taxpayer Identification Number for the Seller or buyer in the transaction?
Then this article may provide a general overview of important tax-related matters and tips to keep in mind – which may help keep you and your clients from having a costly tax and penalty bill from the IRS!
We will go over some basics on how to not only just comply with FIRPTA rules, avoid holdups in closings, but also to look like a superstar to those involved in the transactions – by identifying in advance how and when to advise your clients to get the right tax advice from a competent tax professional.
For starters, you might ask yourself – What exactly is FIRPTA?
FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980.
According to the FIRPTA Rules – if a person is a US Non-Resident Foreigner and disposes of an interest in U.S. real property, that transaction (and the parties to the transaction) are subject to FIRPTA tax withholding.
This tax law is very complex in scope and language.
The mere ‘disposition’ of real property by a foreign person can trigger the withholding tax of 10% (and newer applicable 15% rate for transactions over $1 million per the 2015 PATH Tax Act!)
It is important to note that per the IRS Tax Laws a disposition is defined as not only a sale or exchange of real property – but it can also be applicable to gifts and transfers of such property.
The tax act puts a duty for a tax withholding of 10% tax (and newer applicable 15% rate for transactions over $1 million per the 2015 PATH Tax Act) on the net proceeds on the purchaser(s), sellers, real estate agents and escrow agents such as the title company or law firm performing the closing.
When a foreign corporation is the party transferring the real property, then the required withholding tax applicable can be 35% of the net gain on the transfer – and not the commonly perceived 10% (and newer applicable 15% rate for transactions over $1 million per the 2015 PATH Tax Act)
There are several other scenarios described in the tax code and often no two transactions are exactly the same in how these laws apply -based on the specifics facts and circumstances. This is why getting the right help from a competent tax professional is crucial!
The good news is that there are some exceptions provided for the FIRPTA withholding tax applicable – however it is important to note that these are not all automatically applicable. Often, an Early Withholding Exemption Application must be filed with the IRS in advance of a real estate closing – in order to obtain a written determination of the actual withholding tax or exemption applicable to the transaction.
The IRS also requires that the parties to the transaction listed on the application or remittance forms have a US Taxpayer Identification Number such as a Social Security Number, Employer Identification Number, or in the case of a individual US Non-Resident – an International Taxpayer Identification Number – also known as an ITIN.
If one of the parties to the transaction listed on the remittance or withholding exemption application forms do not already have a US Taxpayer Identification Number – it would be advisable that a completed application such as a Form W-7 for an individual or a Form SS-4 for a corporate or LLC type entity be attached to the package filed.
This may help avoid the filing get rejected by the IRS or the funds remitted from getting potentially literally lost in limbo in the IRS system making crediting them to the seller nearly impossible to be possibly later claimed back as a refund – as applicable.
Also important to note is that If the IRS deems you are a responsible party for the FIRTPA withholding tax and you neglect to do so, you may be held liable for the tax!
If there is a moral to this story – it would be that if you are a realtor, purchaser, or real estate attorney who represents a foreign non-resident person, foreign entity or even a U.S. entity which is owned by a foreign person it is critical that you insist that the purchaser or seller seek the advice and formally engage a Certified Public Accountant or Tax Attorney to advise how the FIRPTA laws may apply to their particular situation. The office of David L Wrubel, CPA, PA can be of assistance in this capacity.
Should you have questions or need Business or Individual tax advice, out firm is available via phone at (305) 672-4272 [4CPA] – as well as via e-mail at DAVID@CPA-FL.COM. Our Firm Website is WWW.CPA-FL.COM