The US real estate market, whose value is expected to hit $119.80tn in 2024, is vast and competitive. If you’re dead set on thriving as a foreign real estate seller, you must do more than acquire a license and create a killer marketing plan. Are you wondering what else you can do?

Get a grasp on the Foreign Investment in Real Property Tax Act (FIRPTA). Many can attest that this tax law rarely comes up. But when it does, and it turns out that you have neglected your obligations, you could face hefty penalties that may put a brake on your operations.

In this article, we’ll help you understand FIRTPA, how it might affect your real estate business, and more. Keep scrolling!  

What is FIRPTA?

Initially enacted in 1980, FIRPTA is a rule or mechanism designed to ensure non-US real estate sellers pay tax from their income after closing on a property.

However, as of this writing, the Internal Revenue Service (IRS) lacks a system to ensure they pay the tax, so the responsibility rests on the buyer. With the right FIRPTA solution, real estate investors are required to withhold a specific amount (usually 15%) of the seller’s proceeds.

For instance, if a foreign real estate owner sells a Denver apartment at $1M, the buyer must keep $150,000. Then, they should forward the amount to the IRS within 20 days of closure, along with Form 8288 and Form 8228–A. Failure to remit it could attract serious penalties for not only the foreign real estate seller but also the buyer or withholding agent.

It’s worth mentioning that the process and requirements of paying the tax may vary from one situation to another. Again, keep in mind that even if the seller makes a loss, the buyer must withhold 15% of the sale price.

3 Things to Know About FIRPTA

Now that you know what FIRPTA is, here are three  more things you should keep in mind:

1. FIRPTA Only Applies to Foreign Sellers 

The first thing to remember is that FIRPTA will only apply if you’re considered “foreign,” regardless of whether you’re an individual or an organization. Even so, coming from another nation doesn’t necessarily mean you’re a foreigner. In the United States, a foreign person is a “non-resident alien,” and foreign companies cannot be recognized as domestic.

So, this brings us to the question — who’s a non-resident alien? This individual doesn’t meet the Green Card or Substantial Presence Test. They could fall into any of these two categories:

• They have newly arrived in the US on a J-1/F-1 visa
• They are students who have not been in the US for five calendar years

Still, note that a non-resident alien may be put into the resident alien pool for tax purposes if they have physically been in the nation for at least 32 days in the current year and at least 183 days during a 3-year duration. This includes the current year and the following two years. 

2. There Are Exceptions 

Under some circumstances, FIRPTA withholding is not mandatory. These include the following:

• If the transferee or buyer intends to use the real estate property as a residence and the gross sales price sits at $300,000 or less 
• The transferee gets a withholding certificate from the IRS exempting them from withholding The property sold/disposed of is an interest in a domestic company/corporation if any of its class of stock is often traded on a well-established securities market
• The transferor (seller) gives the buyer a certification stipulating that, under penalties of perjury, they are not a foreign person. In such a case, the document must contain the seller’s name, home/office address and U.S. taxpayer identification number
• The seller gives the buyer a written notice stating that there is no recognition of any loss/gain on the transfer required owing to a nonrecognition provision by the Internal Revenue Code The amount the seller realized after closing on the property is zero

The United States or a US state acquires the property  You can learn more about exceptions from FIRPTA withholding here. 

3. Some Sellers Have Privacy Concerns   

If you’re concerned about your privacy, you are not alone; many other real estate sellers have expressed worries, too. So, unfortunately, the IRS requires you to disclose your social security number and other personal information when reporting FIRPTA transactions.

This means the buyer must have the details to remit the tax to the IRS and save both of you from the unpleasant legal consequence of failing to pay the money.

On the upside, you can get the buyer to sign a non-disclosure agreement to prevent them from sharing your details with any third parties. Besides, you can take various steps to avoid giving your social security number and other sensitive information.

For instance, Forms 8288 and 8228–A should contain the buyer’s and seller’s identifying numbers. Even so, the buyer must still remit the tax to the IRS, which prevents the seller from obtaining a refund.

Conclusion

Compliance with FIRPTA is essential to your success as a real estate seller in the United States. If you’re a first-time seller or know little about the process, you can consult skilled professionals to help you understand how the tax remittance procedure works. Still, you can do more research on FIRPTA to know your rights and obligations as a foreign real estate seller.