Education

First Real Estate Property Tax Act of 1980 (“FIRPTA”)

Under some circumstances, the IRS imposes a tax on transactions where a foreign  person is selling real estate.  It is important to have a working understanding of when the Foreign Investment in Real Estate Property Tax Act of 1980 (“FIRPTA”) applies

1. Who is a “Foreign Person” under FIRPTA?   

In order to determine if the transaction is taxable under FIRPTA, the first question you have to ask is whether the “transferor”, that is the person or entity selling the property, is a “Foreign Person” as that term is defined by the IRS 

1. “A Foreign Person is a nonresident alien individual, foreign corporation that has not made an election under section 897(i) of the Internal Revenue Code to be treated as a domestic corporation, foreign partnership, foreign trust, or foreign estate. It does not include a resident alien individual.”  https://www.irs.gov/individuals/international-taxpayers/definitions-of-terms-and-procedures-unique-to-firpta#foreign

1. Who is a nonresident alien?  “A nonresident alien is an alien who has not passed the green card test or the substantial presence test.”  https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens

• Green Card Test: 
• “Are you an “immigrant” (Lawful Permanent Resident) of the United States under the immigration laws of the United States? Aliens who are Immigrants are Resident Aliens of the United States for tax purposes, under the condition that they spend at least one day in the United States.” https://www.irs.gov/individuals/international-taxpayers/the-green-card-test-and-the-substantial-presence-test

• What is the substantial presence test? 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

• All the days you were present in the current year, and
• 1/3 of the days you were present in the first year before the current year, and
• 1/6 of the days you were present in the second year before the current year. https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

1. There is an exception for No Withholding (i.e., no tax!): 

• The sale is less than $300,000.
• The Buyer or a member of their family “must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant.” https://www.irs.gov/individuals/international-taxpayers/exceptions-from-firpta-withholding
• An affidavit must be signed at closing by the Buyer attesting to these facts.  This is known as a FIRPTA Affidavit.  

1. Amount to be Withheld

• 10% Withholding of Contract Price
• If the sale is over $300,000 but less than $1,000,000.
• The Buyer or a member of their family “must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant.” 
• An affidavit must be signed at closing by the Buyer attesting to these facts.  This is known as a FIRPTA Affidavit. 

• 15% Withholding of Contract Price: 
• The property is over $1,000,000 (there are no exceptions to this).

• If the 10% or 15% Withholding applies, then the Seller, Buyer or Buyer’s agent can apply for a Withholding Certificate with the IRS in order to adjust the amount that is withheld.  These Withholding Certificates are completed when a transaction closes and are based on a variety of categories. 
  https://www.irs.gov/individuals/international-taxpayers/withholding-certificates

In practice, if someone is considered a non-resident alien, and if the specific transaction does fall within one of the categories above, it is advisable to speak with a tax professional about the tax implications and under what way a Withholding Certificate could be sought.        

1. What are the Purchaser’s Obligations under FIRPTA?

• The purchaser is ultimately responsible for the FIRPTA withholding.  This means that if the withholding is not handled correctly, the IRS can pursue the Buyer after closing for the full 10%/15% (whichever applies) of the sales price, in addition to fines, penalties and interest.  

• FIRPTA tax is ultimately the buyer’s responsibility.   

Kelly Satterwhite, Esq.
Managing Attorney, Old Town Office 

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