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 As of January, 2016, new laws now pertain to FIRPTA withholding.  The primary change is an increase in the rate of FIRPTA withholding from 10% to 15%.  A reduced rate of withholding of 10% will apply to the sale of a house where the amount realized is $1 million or less AND the purchaser of the property signs an affidavit that the  house will be used exclusively for personal use.  It is best to contact a tax specialist for any questions concerning FIRPTA for non-resident owners of U.S. Rental & Investment Property.

 

FOREIGN INVESTMENT REAL PROPERTY TAX ACT

 

 

Foreign Investment Real Property Tax Act or commonly known as FIRPTA is a U. S. tax law

that states a foreign investor must have 10% of the selling price of the property withheld at closing and within twenty (20) days these funds must be sent to the Internal Revenue Service.  If that happens, in some cases, it has taken more than two years for the seller to obtain their funds back.

 

To avoid this from happening, an exemption request may be filed with the IRS on or before the date of closing.  What this request does is to present all the facts to the IRS and requests that they determine what they feel is the correct tax due.  If the exemption request, Form 8288-B, is present at closing, the closing agent- usually the title company- does withhold the 10% funds, but are allowed to keep these funds in their escrow account until the IRS has made their determination.  At such time the funds are then disbursed according to the IRS.  Their determination can range from zero to many thousands of dollars.  It all depends upon the capital gain or loss made on the sale.  This process takes anywhere from 4 to 6 months.

 

An exception to this rule is if the buyer is going to live in the home 50% or more of the time for the next two years and the amount realized is less than $300,000.00  It doesn’t exempt the seller from paying capital gains taxes only from having the 10% funds withheld.

 

If the property sold has been investment property and the seller has filed the appropriate tax returns with the IRS and if there have been rental loss carryforwards, these losses may offset any capital gains from the sale of the property.

 

In order to prepare the exemption request the following information is required:

  1. Name & foreign address of seller and tax identification numbers (ITIN).
  2. Property address.
  3. Buyers name and address and tax identification numbers (ITIN).
  4. What was paid for the property (substantiated with closing statement or tax rolls).
  5. Capital improvements (must include invoices).
  1. What the property is selling for (substantiated with closing statement or copy of       contract).
  2. Closing costs (substantiated by closing statement or from information prepared by the realtor).
  3. Date of closing and name of title company.
 

The fee to prepare this form is $300.00 and may be paid at closing.

 

(This information is not intended to include all of the FIRPTA laws, but only to give the reader a brief overview.)