If you are a foreign national or you are assisting a foreign national client in selling real estate, you are most likely familiar with Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). When you are handling a real estate transaction involving a foreign seller, depending on the value of the property and how it will be used, the transaction is generally subject to a 15% withholding on the purchase price due to FIRPTA. The Act places the responsibility of the Buyer for this withholding.
For the purposes of FIRPTA, a foreign seller is defined as either a non-resident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust or estate. A person is considered to be a resident alien under FIRPTA if they have legal permanent resident status in the U.S. (they have a Green Card), and they meet the substantial presence test which sets a minimum number of days they must be physically present in the United States.
The formula for the substantial presence test is as follows:
- 31 days during the current year;
- 183 days during 3-year period
- All the days present in the current year, &
- 1/3 of the days present in the first year prior, &
- 1/6 days present in the second year prior.
If you are buying or selling a property, and the Seller is a foreign national, it is highly recommended that you obtain legal counsel to guide you through the complex particulars and ensure that the financial obligation you are about to embark on is drafted specific to your needs and in your interest. For any questions or assistance, please contact us as we would be happy to guide you.
Prior to the PATH Act of 2015 (“Protecting Americans from Tax Hikes 2015”, effective 12/18/2015), if the seller of real property is a foreign person, Federal law required buyers to withhold 10% of the gross sale price and provide it to the IRS. With the implementation of the PATH Act, this 10% tax requirement has been altered. Effective February 16, 2016, the 10% withholding tax will be increased to 15%. Meaning, if you are a foreign person selling U.S. real property, 15% of the gross sales price of that property will go to the IRS in the form of a tax.
There are a number of exclusions that must be noted: first, if the transaction has a sales price of $300,001 to $1,000,000 AND the property is meant as the buyer’s principle residence (according to the IRS, a principle residence requires: “you or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant”), then the 10% tax requirement remains. Second, for transactions of $300,000 or less, AND the property is to be the buyer’s principle residence, there are NO tax withholdings due to the IRS under Foreign Investment in Real Property Tax Act (hereinafter “FIRPTA”). Other circumstances that are exempt from paying this FIRPTA withholding tax to the IRS include: if a non-foreign affidavit is provided by the seller, if a withholding certificate is granted to the seller by the IRS, if the amount realized by the seller is zero (zero gain or compensation), and if the property is purchased by the U.S. government or a political subdivision. Therefore, all transactions where the property is NOT meant to be the buyer’s principle residence (at any sales price) will require the new 15% withholding to the IRS.
*NOTE: According to the IRS, a foreign person is a “…nonresident alien individual, foreign corporation, foreign partnership, foreign trust, a foreign estate, and any other person that is not a U.S. person. It also includes a foreign branch of a U.S. financial institution if the foreign branch is a qualified intermediary. Generally, the U.S. branch of a foreign corporation or partnership is treated as a foreign person”.*
We are honored that our very own Attorney Gulati’s Article on Foreign Buying Flipside was published in the Orlando Realtor’s Legal Resource Winter Edition.
This Article discusses the FIRPTA withholding in Real Estate Transactions. To read more click here.
On Thursday November 14, 2013, our very own Attorney Gulati participated in the North East Indo-US Chamber of Commerce Legal Panel with five other leading attorneys in the area. After a successful panel, she was presented with an Appreciation Award.
If you missed the event, here are a few questions she answered on the panel:
What are some common mistakes immigrant small business owners make?
- Do not plan to protect their assets
- No business plan
- No budget
- Did not get an attorney to review contracts before entering into them
- Such as leases, confidentiality agreements, vendor, phone contracts, etc
- Tax issues- did not seek advice from a CPA
- Not getting the correct or required licenses
- Starting with large amounts of debt
What factors should a home-buyer consider before purchasing a home or investment property in the current real estate market?
- What kind of property are you looking into
- Do your due diligence of the property and make sure it is outlined in the contract so you have ways to get out if there is something not favorable to you. i.e. Make sure you have contract contingencies in place.
- Location- such as attractions, school district, community resources, this also helps resale.
- Have a plan and exit strategy
- How are you financing the property
It was also our distinct pleasure to have Attorney Gulati discuss the FIRPTA requirements for foreign Sellers on November 15, 2013, at the North East Florida Association of Realtor’s- Global Business Council. If you would like more information on this presentation or a copy of the PowerPoint discussed, please contact us.
To join any of these great organizations please e-mail us for more information.
U.S. Realtor’s, rental agents, and closing agents are encountering an increasing number of situations that involve foreign persons selling their U.S. real estate.
The sale of a U.S. real property interest by a foreign person is subject to the Foreign Investment in Real Property Tax Act of 1980 (also known as FIRPTA) income tax withholding. This Act taxes non-U.S. investors on gains from U.S. real property investments.
*Please note that FIRPTA applies to what it defines as a U.S. real property interest, which includes not only interests in land, but interests in buildings, mines, wells, crops and timber as well.
What does this mean for foreign owners? When an individual foreign person sells U.S. real property, the transferee, usually settlement officers or closing agent’s, are required to withhold ten percent of the amount realized on the sale. There are special rules for foreign corporations, which will not be discussed in this Article. The amount realized is generally the amount paid for the property commonly known as the purchase price.
The ten percent must be withheld at closing and be remitted to the Internal Revenue Service (IRS) no later than 20 days after the transfer.
What does this mean to real estate and closing agents? It is important for agents to inform foreign owners of the FIRPTA withholding requirement or the requirement to provide a tax identification number (TIN). If you do not inform or give enough notice to the foreign owners of the FIRPTA requirements you may be held liable.
There are some exceptions to the FIRPTA withholding, and the most common is that the transferee is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his or her home and the purchase price is not more than $300,000.00.
Gulati Law deals with these types of issues on a regular basis with their foreign clients. We also assists with contract preparation and real estate closings, as her law firm is equipped to issue title insurance, owner’s policies and lenders policies. Raised by a family of real estate brokers, she has the experience and knowledge as well as being a licensed Real Estate Agent herself.