Jumping through the many hoops that accompany the purchase of real property from anyone, let alone from a foreign individual, are enough to make anyone dizzy. The Internal Revenue Service imposes so many restrictions – with hundreds and thousands of highly specific provisions that can each carry stiff penalties – that large transactions can feel like minefields of tax violations just waiting to go off. In these situations, adding an international element to the mix can further complicate your life.
The best course of action when dealing with a transaction of this nature is to reach out to an experienced accountant who is familiar with the relevant tax codes and who can guide you through the treacherous waters of the IRS. The team of certified public accountants at U.S. Tax Help are led by veteran CPA Ted Kleinman, a specialist in the field of international tax law. To find out how Ted and his team can help you through your situation, call (541) 923-0903 today and set up a consultation at your earliest convenience.
The Foreign Investment in Real Property Tax Act of 1980
Though there are a host of potential tax implications when buying real property – including the real estate transfer tax, or stamp tax – most of these are relatively straightforward. The law to really watch out for if you’re buying property from a foreign person is the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA for short.
The actual text of this piece of legislation is convoluted, but the gist of it is simple: when buying real property from a foreign person, the buyer (or their agent) must withhold a certain amount for taxation purposes. The rationale behind this is that it can be difficult for the IRS to tax a foreign citizen, but it can, however, require that the American entity purchasing the property holds some of the money on behalf of the government. Failure to do so could cause the buyer to become liable for that tax burden in place of the seller.
To ensure compliance with FIRPTA, it is in the buyer’s best interest to determine conclusively whether the seller qualifies as a “foreign person” under the law. In essence, any individual who is a non-resident alien falls into this category and is taxed at a withholding rate of 15 percent on real property transactions. Larger entities, such as foreign corporations and financial institutions, are also under the domain of FIRPTA and carry withholding requirements, though the taxation rates can vary for corporations.
Keep in mind that this law not only applies to “real property” – land and the buildings that sit upon it – but also to financial interests in natural deposits of water, oil, or minerals. It also encompasses personal property used in connection with real property, such as farming machinery or oil wells.
Reporting and Paying Taxes on FIRPTA Transactions
As with all things tax-related, the Internal Revenue Service uses specific forms to handle the reporting and payment of tax burdens imposed by FIRPTA. The two bits of paperwork you’ll need are Form 8288 and 8288-A, which are used as the withholding tax return and statement of withholding, respectively. These forms are required regardless of whether you are an individual, corporation, estate, trust, or partnership, and they must contain the Taxpayer Identification Numbers of both the buyer and seller. The deadline to file these forms is typically within 20 days of the transfer.
Either the buyer or seller can also apply for a withholding certificate with the IRS, which changes or eliminates the withholding rate of that particular transaction; the agency will generally rule on the application within 90 days of receiving it. If an application for a withholding certificate is still pending at the time of the transfer, the correct tax must be withheld but does not need to be reported or paid until either the certificate or notice of denial is sent by the IRS. Once this document is received, the buyer has 20 days to pay the tax.
Exemptions from FIRPTA Withholding Requirements
The withholding requirements enshrined in FIRPTA apply to the majority of transactions, though there are some exceptions. One of the most common and most practical of them is the exception for residences. Under FIRPTA, a transaction is exempt from withholding taxes if the buyer is purchasing property for use as their primary residence for at least two years after the transfer is complete. The total sales price cannot exceed $300,000, however, and the buyer must be an individual, not a company or organization, to qualify. A skilled accountant can explain any additional exceptions that may apply to your transaction and how they could potentially save you money.
Accountants Specializing in International Tax Law Available Today
With more than three decades of experience dealing with the ever-changing requirements of the IRS, Ted Kleinman and his team of certified public accountants stand ready to guide you through the most complicated of transactions. To learn all about FIRPTA and how to navigate the law with ease, call us today at (541) 923-0903 and set up your first consultation.