The Foreign Investment in Real Property Tax Act, better known as FIRPTA, has been put in place to make sure that foreigners owning real estate property in the U.S. complete and file the appropriate tax documentation in respect to the sale or transfer of that property.
When a foreigner sells or transfers real estate here in America, there are various process and procedures outlined by the IRS that they must go through in order to be compliant with their tax requirements. When a foreign person works with a professional tax service provider, they may be able to reduce the tax impact, but it’s important to reach out to them in plenty of time.
For anyone who is new to FIRPTA, here’s why advance planning is so crucial:
Why you should always plan ahead for FIRPTA
Throughout the US, the buyer is generally in the most dominant position when it comes to real estate transactions, and at almost every point in the buying process, they are able to walk away from the deal. When FIRPTA plays a part, because a withholding certificate must be secured, this can delay the sale significantly.
As a seller, to avoid the buyer backing out of the sale because it’s taking so long to obtain the necessary certificates, or because of a change in market conditions, you should try to obtain the withholding certificate as soon as possible. One way of expediting the entire process, is to work with a professional accountancy firm who offer assistance with FIRPTA.
What is a FIRPTA Withholding Certificate?
This certificate is used to minimize the amount of the sale price that is withheld, and without one – even though the capital gains on certain sales may be zero – the US government will require a percentage of the sale price to be withheld.
How can you avoid a percentage withholding?
By filing an IRS form 8288-B, the transfer can apply for a withholding certificate to avoid a percentage withholding. Should the IRS accept the form, then the withholding no longer applies and will be reduced or eliminated.
If the form is accepted by the IRS, then the standard 15% withholding does not apply, and withholding based on the transfer or sale of the property will be reduced or eliminated.
Why is it so important to plan ahead and file Form 8288-B in a timely manner?
Even before the global pandemic struck, the IRS were often taking more than 90 days to process the 8288-B request, and should the certificate be issued before the property has been transferred, no withholding is required.
Still sound a little too complex or confusing? Don’t worry, help is at hand. When it comes to issues surrounding FIRPTA, it often makes sense to enlist the help of a professional tax firm who are experienced at dealing with such matters, and not only can this speed things up for you, but it guarantees that you limit your tax commitments by as much as is legally possible.