If we were to tell you that many properties in South Florida are owned by people with different nationalities it would certainly not come as a surprise to you. As a matter of fact, many homes in the area are owned by folks from different countries in Europe, the United Kingdom, Canada, South America, the Caribbean Islands, Russia, China, and Australia, among others. As a matter of fact, Chinese buyers made up around 20% of the purchases in the rapidly growing Orlando market
As homeowners, these foreign nationals hold title of their properties in their own names. And so it happens that when they sell these houses they bump right into a federal law known as FIRPTA or the Foreign Investment Real Property Tax Act.
Whether you are the foreign national selling the property or the American citizen purchasing it, it is important to understand FIRPTA and your possible involvement with it. Here are a few pointers:
What is the reasoning behind FIRPTA? Its purpose is to prevent these foreign owners from taking the profit from the sale of their American homes to their countries of origin, far from the reach of the IRS.
How does FIRPTA work? The buyer (also referred to as transferee) had been required to withhold 10% of the sales price from the seller’s (or transferor) proceeds if the sale had occurred before February 17 of 2016. After that date, the rate increased to 15%.The buyer also needs to remit this amount to the IRS within 20 days of the closing.
Are realtors involved? Yes, any broker or title company involved must verify that the money is remitted or face penalties.
What is the biggest issue with FIRPTA? It’s the requirement of the withholding even if the seller has an obvious loss.
So, how does the seller get his money back if he has a loss? The only way to get the money back is to either apply for a withholding certificate or wait until the following year and file form 1040NR showing the loss and thereby qualifying the file for a refund.
Are there any exemptions to the requirement of withholding? Yes, and there are two. The first one applies to residential sales worth less than $300,000.00. In this case, also the buyer or a member of his family must reside in the property for at least 50% of the number of days in the first two years following the sale. The second exemption occurs when the seller purchases from the IRS a withholding certificate specifying the amount required to be withheld. The application is designed to show the basis for the seller in the property from the original purchase, any increases in the basis for capital improvements, and the amount being realized from the sale after subtracting costs of sale. This formula is used to show if the seller, as transferor, has any taxable gain. If the application is accepted, no withholding is required.
These are the bare-bones basics of FIRPTA and its implications regarding the transfer of a property where a foreign national is involved. Always ask your financial or tax advisor before taking part in any real estate transaction involving FIRPTA.
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