Foreign nationals, also known as non-resident aliens including G-4 visa holders, who sell property they own in the United States, and the buyers of such property, must be aware of the Foreign Investment in Real Property Tax Act (FIRPTA). Someone who buys real property owned by a foreign national must withhold a portion of the purchase price and pay it to the Internal Revenue Service (IRS) if the cost is above a certain amount.
When you are involved in this transaction, consulting a local tax lawyer could be helpful whether you are the buyer or the seller. An Alexandria FIRPTA lawyer knows the law and could ensure you are in compliance and avoid complications with the IRS.
U.S. citizens pay taxes on their income and capital gains. Foreign nationals pay tax only on certain income items, usually excluding capital gains. 26 United States Code § 1445 ensures that foreign nationals pay tax when they sell real property located within the U.S.
The U.S. buyer must ensure the IRS collects its share of the property sale and assumes tax liability if they fail to withhold the required amount from the transaction. Therefore, a foreign seller must expect to collect less than the agreed contract price for the property, because the buyer is obliged to withhold a percentage of the purchase price and pay it to the IRS.
FIRPTA only applies to foreign sellers. Transactions involving a seller who is a U.S. citizen, Green Card holder, or a U.S.-based business or legal entity does not need to comply with FIRPTA. Transactions when the seller is a legal entity with multiple owners, one or more of whom is foreign, might be subject to FIRPTA.
However, FIRPTA does not apply to people and entities meeting the IRS’ “substantial presence” test. A foreign national or entity intending to sell U.S. real property should immediately seek advice from an Alexandria attorney to explore whether they are exempt from FIRPTA under the substantial presence test.
Real property under FIRPTA includes more than just real estate. Assets that are “inherently permanent” and attached to a specific parcel of real estate could trigger an obligation for FIRPTA withholding. Examples might include oil and gas exploration equipment, wind turbines, underground fiber optic cables, agricultural irrigation systems, and similar property.
If FIRPTA applies to a transaction, the buyer must withhold a percentage of the purchase price–either 10% or 15%–and submit it to the IRS with Form 8288 and Form 8288-A. If the buyer intends to use the property as a permanent residence, then an exception may apply. If the price is $300,000 or less, the buyer does not make any FIRPTA withholding or file anything with the IRS. The buyer must withhold and then remit to the IRS 10% of the purchase price if the price is between $300,000 and $1,000,000.
Purchases involving non-residential real property are subject to 15% withholding under FIRPTA. The 15% withholding requirement also applies to transactions involving residential property the buyer does not intend to occupy as a permanent residence, and to property selling for more than $1,000,000, regardless of how the buyer intends to use the property.
Sellers can apply to the IRS for a FIRPTA withholding certificate. If granted, the certificate could permit a reduced withholding amount. An Alexandria FIRPTA attorney could advise a seller on whether obtaining the certificate could be beneficial in a specific case. Alternatively, in the event the FIRPTA tax exceeds the tax due, the foreign seller could file a U.S. income tax return to claim a tax refund.
A foreign seller does not risk penalties if the buyer fails to make the proper withholding. The IRS will attempt to collect the unpaid amount plus interest from the buyer as of the date the withholding was due. The IRS also could seek penalties if the failure to pay was willful.
However, a seller could risk liability if they fraudulently claim they are not foreign. Many buyers will seek an Affidavit affirming that the transaction is exempt from FIRPTA, and a seller risks legal consequences if they knowingly affirm none of the property’s current owners is foreign. Sellers should consult an Alexandria attorney if there is any question whether FIRPTA might apply before signing such an Affidavit.
When you sell real property you own in the United States, you want the best possible price. You must factor FIRPTA withholding into your calculations and consider applying for a withholding certificate or file a U.S. income tax return to seek a tax refund. If you are buying real property currently owned by a foreign person or entity, you must comply with the withholding requirements or face interest charges and potential penalties.
An Alexandria FIRPTA lawyer could explain how the withholding rules might impact your sale and ensure you comply with the law. Learn the value Pontius Tax Law can provide by calling us for a consultation.
Pontius Tax Law, PLLC is a tax law firm that strives to resolve sensitive tax problems through trust, dedication and value. The law firm was founded by John Pontius with offices in Washington, DC, Rockville, MD, Bethesda, MD, Fairfax, VA, and Alexandria, VA. Mr. Pontius represents individual and business clients with sensitive and serious tax matters before the Internal Revenue Service and state taxing authorities. His client base is local, national, and international.
Over the course of his career, Mr. Pontius has represented businesses and individuals with complex tax issues in the following areas: FBAR examinations, offshore and domestic disclosures, FATCA, FIRPTA, tax planning, unfiled tax returns, release of tax liens and levies, trust fund recovery penalty, IRS and state audit examinations, as well as appeals, penalty abatement, U.S. Tax Court litigation, along with defense of tax fraud and evasion. If you require assistance from a tax lawyer, contact Mr. Pontius to discuss your situation.