What is Foreign Investment in Real Property Tax Act (FIRPTA)?
This article covers What You Need To Know About Foreign Investment in Real Property Tax Act – FIRPTA.
The Tax Act For Foreign Investors
FIRPTA stands for “Foreign Investment in Real Property Tax Act,” which became law in 1980. This Federal Law protects the U.S. Government’s interest in collecting taxes owed from real estate transactions involving foreign sellers.
You need to know about the Foreign Investment in Real Property Tax Act (FIRPTA) because it can hurt a buyer or a seller. The Foreign Investment In Real Property Tax Act is the law that taxes foreign nationals. It allows potential income tax money to be withheld from foreign citizens when they sell property in the United States. This Foreign Investor Tax Act first became law in 1980 but was often unknown due to lower sales prices.
The FIRPTA Seller Exemptions
The Foreign Investment in Real Property Tax Act excludes all property that is sold under $300,000. This Act was not an issue in most U.S. cities until recently. Before now, there were not many properties sold over the applicable limit. If FIRPTA affects you, you need to apply for a seller exemption. We do that for our customers. Ask your Realtor about this tax act and if they are aware of how to get your exemption.
A Foreign Investment in Real Property Tax Act Exemption, if granted, is where the IRS lowers or eliminates the tax withholding amount. The law has set the tax withholding amount at 15% of THE SALES PRICE from the Seller, which can be a lot of money! Do the Math: $300,000 sales price equals a $45,000 tax withhold. It doesn’t matter if there is a loan to pay off – some sellers have to bring money to closing.
Congress enacted the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) as Subtitle C of Title XI (the “Revenue Adjustments Act of 1980”) of the Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, 94 Stat. 2599, 2682 (Dec. 5, 1980).
Why Should You Care About FIRPTA?
All Home Buyers in the U.S. should consider this law important because so many foreign investors now own property in this country. This tax needs to be withheld on homes sold for over $300,000 if the Seller is a Foreign National. If the seller is not aware of this law until the title or escrow company tells him, he’ll probably want to apply for the exclusion. The IRS waiver takes 30-45 days to approve and can easily make a buyer walk away if you have not planned ahead of time for it.
What this means to you:
- Sellers – The withholding amount is 15% of the SALES PRICE- so a minimum of $45,000. Most people don’t want this money tied up for months or up to a year, so they’ll want to apply for the exclusion. This probably means that a potential buyer will need to decide if they will wait for the 30-45 days that approval takes.
- Buyers – If YOU don’t see a signed affidavit or a waiver by the IRS, and if they don’t pay this tax, you might end up paying it in the future. The Foreign Investment in Real Property Tax Act states that the BUYER is responsible for paying this tax to the IRS- NOT THE SELLER! Since taxes are not normally part of a Realtor’s job, we learned about FIRPTA to protect you. I hope that most Realtors know about FIRPTA. However, since we sold Real Estate in Las Vegas for 15 years before learning this law, I wouldn’t count on your Realtor knowing this.
What Is A Worst-Case Scenario Involving FIRPTA?
The Buyer – Say that you bought your house two years ago. You never met or saw Mr. Seller, so of course, you never even thought about what Mr. Seller’s nationality was. His name is David Smith, and Mr. Seller Smith was from Australia. A few months after you got your house, Mr. Smith moved the family back to Australia.
The title company did not do a FIRPTA withhold from Mr. Smith’s proceeds, and he did not file the FIRPTA form or get an exclusion. Now the IRS wants their tax money, and YOU, THE BUYER, WOULD OWE IT!
According to FIRPTA, if the Seller is a Foreign Person, the buyer is responsible for having up to 15% of the SALES PRICE withheld at the close of escrow as a tax. If you are a Foreign Person Seller, you need to consult a tax expert. You may qualify for an exclusion. Exclusions can take 30 or more days, so plan ahead!
The Seller – The Foreign Investment in Real Property Tax Act Exemption or Exclusion takes time. Learning about FIRPTA at the last minute can lead to cancellation and a possible breach of contract. If buyers want to play hardball, they can make your life difficult.
What Happens If The FIRPTA Tax Is Not Withheld?
Since the law makes the tax the buyer’s responsibility, the IRS could and has come after the buyer for payment. Because of this possibility, it is important for a buyer to ask questions and have an experienced agent representing them. Do yourself a favor and read 4 Reasons To AVOID FSBOs!
What Is FIRPTA’s Definition Of A Foreign Person
According to Wikipedia, Foreign persons include individuals who are not U.S. citizens or resident aliens, corporations organized outside the United States, and nonresident estates and trusts. See 26 USC 7701. Note that partners, not partnerships, are subject to tax, so foreign status is determined at the partner level. However, see withholding tax for an overview of exceptions regarding foreign partnerships.
WHAT IF THERE ARE MULTIPLE CITIZENSHIP OWNERS FOR A SINGLE PROPERTY?
What happens when 2 or more people own the house, and one owner is a Foreign Person? If the other/s are U.S. Citizens, the IRS has actually used common sense about this! The answer is that the percentage withheld is based on the percentage of ownership that the Foreign Person owns.
If Affected By The Foreign Seller Tax:
- Meet with us to strategize a plan for you to sell your property
- We provide you with the necessary forms to sell your home and apply it to reduce or eliminate the withholding
- Your property can be marketed but will not close unless there are withhold monies or an exclusion
- If the IRS declines your exclusion request, 15% of the sales price gets withheld at closing. If that is not enough, you need to provide funds to finalize the sale
Reasons For Exclusion Approval
The IRS may agree with a person to substitute a different asset waiving the withhold. Also, if you sell the property at a loss, the 15% withhold amount exceeds this year’s tax liability, or if you gift your profit to a spouse, the IRS grants your exclusion request.
Other FIRPTA Exemptions
YOU MUST STILL APPLY. However, Professional Athletes and Foreign Government-Related People are exempt from FIRPTA. Students, Teachers, Trainees, and their Dependents who have lived in the U.S. for over 5 years are also exempt.
“Substantial Presence” exempts people who have lived in the U.S. for over 31 days “this year” AND 183 days in the last three years. The “days” are counted this way: each day present in the U.S. this year counts as one. One day for every 3 days present in the U.S. counts as one for last year and one day for every 6 days present for the year before. If you meet the 31-day rule AND the 183-day rule, you may be exempt.
How Do You Get Your Money Back From FIRPTA?
Subsequently, you get your withheld money back if you are owed a tax refund after filing a standard U.S. Tax Return.
DISCLAIMER: I know about the FIRPTA rules because I sell Foreign People’s Real Estate for them in Las Vegas, Nevada. Because I am not an Accountant or Attorney, I cannot provide you with any tax or legal advice. Therefore, if you think FIRPTA might apply to you, please seek professional advice.
if In Doubt, Consult An Attorney
FIRPTA is a complicated law, and our blog only scratches the surface. If you are selling your home and think FIRPTA affects you, text or call for an appointment with us.
What You Need To Know About Foreign Investment in Real Property Tax Act (FIRPTA) is complex and can even be scary. We have dealt with FIRPTA and the Foreign Investor Tax Exemptions many times. Make sure that you have a Realtor with extensive experience with the Foreign Investment in Real Property Tax Act on your team.
If you have an inexperienced Realtor, please consult an attorney. You should also consult your accountant to verify that they are familiar with the law.
Always Use An Experienced Realtor
See our home page HomesForSale.Vegas or search Las Vegas homes by zip codes map if you are looking for a home. Searching for a home by zip codes will give you a good idea of area and prices. We work with many foreign investors and homeowners and can guide sellers through the process.
The Foreign Investment Real Property Tax Act is a perfect example of why buying a home from a For Sale By Owner has risks. Our Number 1 Goal with every client is to protect them. If you are going to buy or sell a property in Las Vegas in the future, contact Us today at – 702-750-7599 or fill out the form in the footer.
This blog was written by Kurt Grosse with Realty One Group in Las Vegas. Kurt is a Top-Producing 25 Year Realtor in Las Vegas, Nevada. Kurt’s skills as a former Nevada Building Engineer (PE, CE) make him the unique and the best Realtor in Las Vegas, Henderson, and North Las Vegas.
When you buy a new construction property, Kurt Monitors the Construction until the drywall is up, sending you pictures and videos every week. He and his team look for and show you defects and flaws that they find on the floor, walls, or ceilings while viewing pre-owned homes. Protect yourself by having Kurt and Terri protect you.
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This blog was written by Kurt Grosse with Realty One Group. Kurt has been a top-producing Realtor for over 25 years. Before selling homes, Kurt told major builders in Nevada how to build their homes in his engineering business. Now Kurt uses his building knowledge and real estate skills to protect his buyers and sellers. If you have a home to buy or sell in Las Vegas, call Kurt today – 702-750-7599.
Revised Dec. 21, 2021