There are many situations where tax law and real estate intersect. One of those areas involves withholding for the Foreign Investment in Real Property Tax Act. More commonly known as FIRPTA, this federal law mandates that the buyer of real property withhold the taxes related to the transaction when the seller is a foreign person, and remit them to the federal government.
This law is in place to ensure that the tax debt is paid. Prior to the adoption of the law, the government struggled to secure these tax obligations for foreign individuals after they no longer owned property in the country. It may be in a taxpayer’s best interest to consult with a reliable tax firm when going through this process. A Rockville FIRPTA lawyer could ensure compliance and help a taxpayer avoid any penalties that could come with the failure to follow all federal rules.
FIRPTA is a federal law that applies any time a real estate transaction in the United States involves a foreign seller. This is true not only of foreign individuals but with foreign business entities as well. These businesses could include trusts, corporations, or certain LLCs. A Rockville attorney could assist a business entity in determining if their transaction qualifies for FIRPTA rules.
It is also important to note that this law is aimed at foreign sellers of real estate. If a foreign entity or individual is purchasing real property in the United States from a U.S. citizen, FIRPTA will not apply. Please note that there are FIRPTA exceptions for buyers who plan to use the property as a residence and the sales price is under $300,000.
It is a common misconception that FIRPTA is an additional federal tax on real estate transactions. This is not the case. Instead of a tax, FIRPTA mandates a specific amount of withholding to cover existing tax obligations.
FIRPTA is different from most tax withholdings, as the obligation is on the buyer instead of the seller. The amount withheld must equal 15% of the property’s gross purchase price at the time of closing if it is valued at over $1 million; and 10% if the value is between $300,000 and $1 million. This obligation is placed on the borrower to ensure that the withholding requirement is held by someone with a legal incentive to comply. In theory, the new buyer is either a U.S. citizen or resident that will already have a tax obligation; or they are a foreign entity with a property interest in the United States that could be reached by the federal government if their tax obligations are not paid.
Compliance with FIRPTA must be made in a timely manner. The failure to comply as required by federal law could result in significant civil penalties. If the buyer ends up withholding more than they are required to, a FIRPTA attorney in Rockville could work with the foreign seller of real estate to ensure that they are able to file for a refund. They should be able to file a Form 8288-A if they have a taxpayer identification number (TIN). If they do not already have a TIN, the IRS will provide instructions on how to get one.
On the other hand, if the amount of tax due by the buyer is less than what was withheld, the seller can submit a tax withhold certificate for the proper amount.
If the foreign transferor is giving a piece of real estate as a gift to the transferee, then they must adhere to the U.S. federal gift tax, which ranges between 18% and 40% of the property value. Gifting U.S. real estate can trigger the FIRPTA tax if the giver is relieved of the mortgage or other liabilities secured by the property in excess of the giver’s basis.
Compliance with FIRPTA is vital for any foreign seller who is transferring property to an individual or entity in the United States. If you are involved in the sale of property to a U.S.-based entity, it is vital that you have skilled legal counsel by your side. Reach out to a Rockville FIRPTA lawyer today.
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, Vienna, 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.