FOREIGN SELLERS BEWARE: Why FIRPTA Matters Again
March 27, 2017 |
Christopher J. Charles, Esq.
Founder and Managing Partner, Provident Law
Anytime a foreign investor sells real estate in America, FIRPTA1 is triggered and the buyer/escrow agent is required to withhold 10% of the sales price. Due to the high number of Canadian property owners in Arizona, FIRPTA issues are not uncommon.
FIRPTA impacts foreign individuals when they sell real estate. Put simply, FIRPTA requires every purchaser of real estate to withhold 10% of the sales price to help ensure the IRS’s collection of the seller’s capital gain tax. So instead of receiving 100% of the sales price at close of escrow, if FIRPTA applies, then the foreign individual only receives 90% of the sales price.
FIRPTA always applies unless the seller qualifies for an exception. Below is a list of the most-common exceptions:
- U.S. Citizens: FIRPTA only applies to foreign investors2; so if the seller is a U.S. citizen (or dual citizen), then FIRPA does not apply;
- Buyers: FIRPTA only concerns sellers – FIRPTA does not apply if the buyer is a foreign individual as long as the seller is a U.S. citizen;
- Primary Home: Even if the seller is a foreign individual, if the seller used the property as his primary residence and the contract price is less than $300,000, then FIRPTA does not apply; and
- IRS Form 8288-B: Investors who timely file the IRS Form 8288-B may qualify to minimize or eliminate the 10% withholding.
Importantly, the seller may qualify to avoid the 10% FIRPTA withholding tax by timely filing the IRS Form 8288-B prior to the close of escrow. With proper tax planning, the IRS Form 8288-B advises the IRS that the 10% withholding is excessive due to any relevant tax deductions concerning the investment property.
Thus, with prudent counsel and tax planning, the seller can either eliminate the 10% withholding altogether or at least reduce it to some amount less than 10%.
If you know a foreign individual who is thinking about selling their property, be sure to mention FIRPTA and advise them to seek counsel early. For more information on FIRPTA and other real estate law related topics, please visit our website at www.davismiles.com, or call our office today at 480-344-4596 to schedule a consultation with Mr. Charles.
1The Foreign Investment in Real Property Tax Act of 1980, enacted 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).
2 FIRPTA also applies to properties owned by an LLC or corporation if the income flows through to a foreign member or shareholder.
Christopher J. Charles is the founder and Managing Partner of Provident Law®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”). Mr. Charles holds the AV® Preeminent Rating by the Martindale-Hubbell Peer Review Ratings system which connotes the highest possible rating in both legal ability and ethical standards. He serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.