Although your settlement company may take care of the filing and submission of FIRTPA withholding taxes to the IRS after closing, it is important that you understand what the Foreign Investment Real Property Tax Act (FIRPTA) is and when it applies to a real estate transaction. Read SMART’s answers to the most frequently asked FIRPTA questions about buying from a foreign seller.
Who is responsible for FIRPTA withholdings?
First, assessors from local assessment offices estimate the fair market value of the residential property. All Maryland assessments are certified by the Maryland State Department of Assessments and Taxation (SDAT) then given back to the correct local offices. The property’s appraised value is multiplied by the applicable tax rate, which is the amount owed by the property owner. If the new assessment finds an increase in the property’s value, the additional taxable amount is phased in over the next three years.
Can the buyer assign the withholding responsibility to the settlement agent or escrow agent?
According to the IRS rules, there are no provisions that allow the buyer to assign their responsibility to another person or entity, including settlement, escrow, and real estate agents. It is best to consult a CPA or tax expert for guidance.
The seller is foreign but has a social security number. Do we still need to withhold FIRPTA taxes?
If the seller is foreign, they don’t likely have a social security number (SSN). However, foreign citizens who do business and earn income in the United States are required to have taxpayer identification numbers (TINS) and this number may look similar to an SSN.
If you don’t think FIRPTA applies to the seller or if the seller seems to have an SSN, the best course of action is to have the seller make a statement under penalty of perjury stating that they are not a non-resident alien for purposes of U.S. income taxation.
What does “non-resident alien” mean?
Although this does not cover every possible situation, non-resident aliens are not U.S. citizens, are not resident aliens with green cards, and do not pass the substantial presence test.
The seller is taking a loss on the sale of the property. Do they still need to withhold taxes according to FIRTPA?
Under FIRPTA, automatic exemptions for losses or gains do not exist. If a foreign seller believes that they are exempt from FIRPTA withholding because they did not make a profit on the sale of the property, then they need to seek guidance from a tax expert early in the transaction. The tax expert may recommend applying for a withholding certificate from the IRS, which will grant them an exemption on the transaction using IRS Form 8288-B.
A foreign seller doesn’t have a TIN but is willing to pay the IRS. Can they still send the taxes to the IRS?
No, the IRS requires a foreign seller of real property in the U.S. to have a TIN. The foreign seller must apply for and acquire an Individual TIN (ITIN). This can be done with the IRS online at https://sa.www4.irs.gov/modiein/individual/index.jsp.
If a foreign seller owns a portion of the property, how much money does the foreign seller owe?
The foreign seller will owe withholding taxes on the percentage of the property they own. For example, if the foreign seller owns 30% of the property, then they will pay the 15% withholding tax on the 30% of the property they own. In this example, sales proceeds of $10,000 would mean the foreign seller pays $450 in FIRPTA withholdings at closing ($10,000 x 30% ownership x 15% withholding tax rate).
If a property is worth less than $300,000 and the buyer plans to occupy the home, are they automatically exempt from this tax withholding?
The exemption is not automatic. The buyer must sign an affidavit that states the purchase price was under $300,000 and that the buyer intends to occupy. If the buyer chooses not to sign the form, the FIRPTA tax withholding is required. It is best to consult a CPA or tax expert for guidance.
Is a transaction from a foreign seller to a foreign buyer exempt from withholding?
No, that transaction is not exempt. The same rules apply, and in this case, both parties are required to have TINs.
The FIRPTA withholding was paid at close of escrow, but the seller paid more than was owed to the IRS. How does the foreign seller get the excess money back?
There are two options for this seller. In advance of closing, they can file an 8288-B Application for Withholding Certificate, which requests a reduced amount or no withholding at all. Or, they can file a tax return the following year to receive the excess amount as a refund. A CPA or other tax expert should be consulted for guidance in this situation.
The seller and the buyer want to avoid the cost of hiring a CPA or tax expert. Can the real estate, settlement, or escrow agent help with FIRPTA questions?
Although these professionals likely have experience with transactions that involve FIRPTA, they are not qualified to provide advice on any taxpayer’s unique situations. The best way to avoid an IRS violation is to consult a CPA or other tax expert.
The seller currently lives in another country, but they say they are a U.S. citizen. Is withholding still required?
Current residency is not a reliable indicator of FIRPTA status because U.S. citizens may be living outside of the U.S. at the time of the transaction. The FIRPTA withholding tax only applies to non-alien residents; it does not apply to U.S. citizens currently living abroad.
DISCLAIMER: The information gathered here is deemed reliable as of the date of publication, but it is not guaranteed and it is not intended as legal or tax advice. To learn more about FIRPTA, visit the Internal Revenue Service website and consult a tax expert.
For additional information on this topic contact Evelyn Miller, Partner, at 202-753-7400.
