At American Finance, we provide tax assistance to clients who sell US real estate. In certain cases, money withheld by the IRS on the sale of the property can be refunded.
What is the FIRPTA and what are its implications when selling property?
If you’ve been researching the tax implications of selling US property, you may have seen a number of references to the FIRPTA.
Non-residents selling US property will be subject to the FIRPTA, which stands for the Foreign Investment in Real Property Tax Act.
Its creation was fuelled by the concern that non-residents could be buying US property and taking all of the profits and benefits back to their home country with them. Essentially, it works by compelling the seller to organize the tax which is owed.
This law stipulates that non-residents who sell US real estate interests are subject to income tax withholding.
The rate of withholding is generally 15%, or 10% for dispositions before February 2016.
The closing agent must forward the withheld amount to the IRS within 20 days of the closing date. This amount will then be held by the IRS until it is satisfied that any due taxes have been paid by the non-resident seller.
How is the withholding paid and are there any exceptions to needing it?
It is the responsibility of the buyer (or the transferee) to check whether the seller (or transferor) is subject to the FIRPTA withholding. If so, they have to complete IRS forms 8288 and 8288-A to ensure the withholding is paid.
There are certain exceptions where the withholding is not needed. This includes where the buyer intends to use the property as a residence, and the amount realized on the sale is less than $300,000.
Is it possible to get a refund on the FIRPTA withholding?
Yes, depending on the circumstances.
Where there is a difference between the amount paid and the amount actually owed, a refund can be granted. A tax return must be filed the following year.
Alternatively, some sellers choose to apply for a Withholding Certificate from the IRS. The application for this has to be filed on the day of the transaction, or one day prior.
The buyer will need to be notified of your intention to apply for a withholding certificate, and certain details of both the seller and buyer are needed. In particular, you will need to have a Taxpayer Identification Number (TIN). However, it is important to note that a certificate will not release you from the responsibility of filing a tax return the next year.
Do I need to consult an accountant?
It is sensible to consult an accountant to ensure that your tax return is properly filed. This also maximises the chances of detecting any difference between the amount owed and the withholding taken, and thus the chances of receiving a refund.
If you have further questions on the tax rules that apply to you, you can contact the team at American Finance for further information and assistance.
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Information provided on this website is for guidance purposes only and should not be construed or relied upon as formal tax, legal or financial advice.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.