Foreign Investments in Real Property Tax Act
FIRPTA Stands for the Foreign Investments in Real Property Tax Act, and involves withholding back a percentage of the sales price of the selling property for IRS tax purposes. The IRS wants to make sure that appropriate tax is paid on the sale. The normal amount withheld by the title company is 15%. This is based off the gross sales price and does not include selling fees.
To receive the money back that is being withheld, you either file a FIRPTA Withholding Certificate or a Tax return in the following year. Filing the certificate is usually the most desirable option, especially if you are reporting a loss on the sale. At the day of closing on the property, the Title Company that is handling the sale will withhold the 15% mentioned above while our office files the Withholding Certificate, or Form 8288b. Form 8288b requests that the IRS either remove the withholding requirement or reduce the required withholding to a lower amount. The IRS will then issue a Withholding Certificate Acceptance letter stating there is no tax due. The Title company can then release the funds back to you. This process can take anywhere from 3-6 months depending on a number of issues discussed below.
If the IRS reduces the amount due, the title company with our help will then forward the amount requested to the IRS and issue any remaining funds back to you. The amount sent to the IRS would then be claimed on your next US Non Resident Tax return.
Complications to filing FIRPTA Withholding Certificate:
FIRPTA Withholding Certificates time frame can vary depending on the application. If the seller does not have an Individual Taxpayer Identification Number (ITIN) issued in their name, then our office has to prepare a separate application to request the ITIN that goes with the FIRPTA Withholding Certificate. The usual time to have an ITIN issued is one to two months. From there, the application gets forwarded to the IRS FIRPTA department, and it can take another 2-6 months for this office to process your application.
The same delay will occur if the Buyer also does not have a ITIN in their name, which can occur on rare circumstances.
Other delays include incomplete documentation. Not providing a original purchase HUD from when the property was purchased or show clear documentation of the original cost of the property can delay the filing or cause it to be rejected. At which time, the title company would have to forward the funds to the IRS, and the money would have to be claimed on a Non-Resident Tax Return.
Exceptions to having to file FIRPTA Withholding Certificate:
There are a few exceptions to having any money withheld at closing. If the property qualifies for a exception, then the title company will provide a waiver form for the buyer to sign. Through out the process, the buyer to the property is responsible for the “FIRPTA Withholding” and thus they would have to sign a waiver saying the exceptions are being met. If not, then they are subject to penalties.
The exceptions are listed as follows:
- The property sale price is under $300,000.
- The buyer also plans to live in the residence for 50% of the time during the first 12 months after the sale.
Both Exceptions have to be met in order to qualify for the waiver.
Additional Items to be aware of:
Navigating FIRPTA is complex and can be stressful. Please make sure you make other financials arrangements if you need access to the withheld funds while the IRS is processing the FIRPTA Withholding Certificate. The Title Company will not release the 15% funds until the IRS Acceptance of the Certificate is received.
As stated, the time frame can take 3-6 months and in extreme circumstances can take longer. Sadly, this time frame is out of CPA Solution’s control. We take pride in our work and strive to make sure every Application is correct and has all the required documentation, but we can not control the process after it leaves our office. Requesting ITIN’s also complicates the application and increases the risk of a delay.
Items needed to complete the Application:
The items need vary per application. Please provide all items that apply to your FIRPTA Application:
- A list of full names for every seller listed on the Sale HUD.
- Your Foreign Address.
- A color Copy of your passport, if you do not have an ITIN listed in your name.
- A copy of the original purchase HUD from when you purchased the property.
- Receipts of any major improvements made to the property.
Steps of the process:
Once our office receives all your documents we will begin processing the application. The steps are as follows:
- Our office will prepare a Power of Attorney form if we do not have one on file. This allows us to sign the application on your behalf.
- Your realtor will need to forward our information to the Title Company that is processing the sale. Our office will then request the final sale HUD from the Title Company along with the buyers information as this information is needed to complete the filing.
- Once all the information is gathered, we will prepare the FIRPTA Withholding Certificate Form 8288b and send it to the title company on the day of closing. Our office will also mail out the application to the IRS.
- After the IRS has approved the application, they will then issue the acceptance to our office. Once received we will forward to the Title Company and they will release the remaining funds back to you. This process as stated above can take 3-6 months, and sometimes longer.