About FIRPTA
What is FIRPTA?
FIRPTA is the Foreign Investment in Real Property Tax Act created in 1980
Empowered by the Debt Reduction Act of 1984 and modified by the Path Act in 2015, the Foreign Investment in Real Property Tax Act requires all Buyers of USA real property sold by Foreign Sellers to withhold 15% (with some exemptions) of the full sale price from the Foreign Seller's proceeds and remit that money to the US Treasury Internal Revenue Service (IRS).
The Foreign Seller may then seek a refund and has 3 years to do so, after which the prospect of a refund expires due to a non-negotiable statute of limitations caveat and the IRS keeps the FIRPTA withholding.
Liabilities of Buyers, Sellers & Agents
The IRS holds the Buyer/ Payer 100% liable for the full 15% of gross sale or distribution FIRPTA withholding, remitting these Seller/Payer funds to the IRS within 20 days of distribution unless legitimate exceptions apply. Buyer/ Payer are liable but so are their agents!
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An agent is a person who represents the seller/transferor or the buyer/transferee in any negotiation with another person or that person's agent relating to the transaction or in settling the transaction.
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A person is not an agent if the person only performs one or more of the following acts related to the transaction:
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Receipt and disbursement of any part of the consideration,
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Recording of any document,
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Typing, copying, and other clerical tasks,
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Obtaining title Insurance reports and reports concerning the condition of the property, or
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Transmitting documents between the parties.
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This is an example of where a Seller's realtor can lose their entire commission!
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Seller/transferor's Agent or Qualified Substitute can provide exemption certifications to the Buyer/Transferee.
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If the Agent or Qualified Substitute knows that the interest is not a real property interest, or the corporation is not a foreign corporation and that information is false, and the Agent or Qualified Substitute does not notify you, the agent or substitute will be held liable for the tax, limited to the compensation the agent or substitute gets from the transaction.
A Withholding Agent is personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest.
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A Withholding Agent is any person having the control, receipt, custody, disposal or payment of income that is subject to withholding.
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Generally, the person who pays an amount to the foreign person subject to withholding must do FIRPTA withholding.
FIRPTA Withholding Exemptions
There are certain situations where FIRPTA withholding is not required. That said, notification requirements must still be met. Buyers may not grant exemptions due to the fact the IRS holds Buyer, Payers and their Agents liable.
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Buyers of property where the sale price is $300,000 or less and buyer is an individual who certifies to occupy 50% or more of time in each of the 2 years following the closing.
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Buyers of property where the sale price is $300,001 up to and including $1,000,000 where the buyer is an individual who certifies to occupy 50% or more of time in each of the 2 years following the closing. In this case the FIRPTA withholding is 10% in that range and not the standard 15%.
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Green Card Test: You are a resident, for U.S. federal tax purposes, if you are a Lawful Permanent Resident of the United States. If you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) issued you an alien registration card, Form I-551, also known as a "green card."
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Substantial Presence Test: A complex formula that determines if a Foreign Person is considered a US Person for the calendar year of a purchase in order to be exempt from paying the FIRPTA withholding. It is a counting days process.
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Days do not count if Foreign Person is in USA representing a foreign government, a teacher, student (J, Q, F, M visas) or professional athlete in a charity event.
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Count 31 days during year of sale AND 183 days during the year of sale and the preceding 2 years, ONLY counting all days during sale year; 1/3 days during 1st preceding year; 1/6th days during 2nd preceding year.
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Foreign person or entity whose only US business activity is trading stocks, securities, or commodities (including hedging transactions) through a US resident broker or agent.
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Foreign persons or entities collecting certain types of US source interest income which meet the statutory exemptions from FIRPTA withholding and tax (obligations payable 183 days or less from date of original issue, bank deposit interest and portfolio interest).
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Property disposed of is an interest in a domestic corporation of which any class of their stock is regularly traded on an established securities market.
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Does not include certain dispositions of substantial amounts of non-publicly traded interests in publicly traded corporations.
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Seller/transferor furnishes US taxpayer identification and furnishes non-foreign affidavit.
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Non-publicly traded domestic US corporation that furnishes an affidavit that the interest is not a US real property interest. To qualify:
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During last 5 years (or less if held by present owner) the corporation was not a USRPHC.
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Certification required, dated not more than 30 days before the transfer date.
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Seller/transferor provides a Qualifying Statement from the Secretary of the Treasury that they are exempt .
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Receipt of a withholding certificate from the IRS that excuses the withholding.
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Written notice requirement that no gain or loss on transfer is required because of a non-recognition provision in the IRS code or a US tax treaty. Must be submitted to the IRS under same time requirements of FIRPTA withholding.
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The amounts that Seller/transferor receive amount to $0
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Option to purchase that are granted or lapsed.
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Dispositions of interests in publicly traded partnerships or trusts
USRPI and USRPHC
US Real Property Interests and US Real Property Holding Company
USRPI = U.S. Real Property Interest includes more than a direct interest in real estate.
USRPI SUBJECT TO FIRPTA WITHHOLDING
•Real Estate: permanent improvements, structures and structural components relating to operation or maintenance
•Real Property including unsevered natural resources such as mines, wells, crops, timber or other natural deposits, and property associated with the use including movable walls and furnishings
•located in the USA, its territories or the US Virgin Islands, and...
Investment Income: Certain income from US sources connected with the trade or business of USRPI. This is broken down into:
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Effectively Connected Income (ECI) which is subject to deduction offsets and
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Fixed, Determinable, Annual or Periodical Income (FDAP), which is not.
Our examiners employ multiple tests to determine if dispositions are assets business activity income.
A CORPORATION IS A US REAL PROPERTY HOLDING COMPANY (USRPHC) if
after performing qualifying tests , the formula for measuring all of its USRPI inside the US and outside plus all other assets held in its trade or business is more than half (50% or more)
Effectively Connected Income (ECI)
It is important to test every FIRPTA disposition for ECI income and deductions and know how to report it to the IRS or suffer an audit well after the transaction has closed and you think you are home free.
When a foreign person engages in a trade or business in the US, all income from US sources connected with the conduct of that business is Effectively Connected Income.
Certain kinds of investment income are treated as ECI
•The Asset-Use Test held or used in US trade or business
•The Business Activities Test as a factor in realization of income
1. During the tax year
2. Based on examination of the nature of activities
3. Deductions are allowed against ECI
Fixed, Determinable, Annual, or Periodical Income (FDAP)
It is important to test every FIRPTA disposition for FDAP income which is a form of Effectively Connected Income (ECI) and know how to report it to the IRS or suffer an audit well after the transaction has closed and you think you are home free.
FDAP is taxable income other than gains from sale of real or personal property and items excludable from gross income (tax exempts, scholarships, etc.) or stock and securities trades through a US broker.
Certain kinds of FDAP may be ECI for income purposes but not treated as ECI for withholding purposes!
FDAP is taxable income other than gains from sale of real or personal property and items excluded from gross income (tax exempts, scholarships, etc.) or stock and securities trades through a US broker.
The IRS lists the following included in FDAP income items:
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Compensation for personal services
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Dividends
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Interest
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Original issue discount
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Pensions and annuities
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Alimony
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Real property income, such as rents, other than gains from the sale of real property
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Royalties
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Scholarships and fellowship grants
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Other grants, prizes and awards
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Sales commission paid or credited monthly
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Commission paid for a single transaction
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The distributed net income of an estate or trust that is FDAP income, and that must be distributed currently, or has been paid or credited during the tax year, to a nonresident alien beneficiary
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Distribution from a partnership that is FDAP income, or such an amount that, although not actually distributed, is included in the gross income of a foreign partner
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Taxes, mortgage interest, or insurance premiums paid to, or for the account of, a nonresident alien landlord by a tenant under the terms of a lease
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Prizes awarded to nonresident alien artists for pictures exhibited in the United States
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Purses paid to nonresident alien boxers for prize fights in the United States
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Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States
Requirements to File Tax Returns
A. Who Must File
If you are any of the following, you must file a return:
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A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year.
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This includes selling US real estate property interest(s). However, if your only U.S. source income is wages in an amount less than the personal exemption amount you are not required to file.
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A nonresident alien individual who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.
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A representative or agent responsible for filing the return of an individual described in (1) or (2),
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A fiduciary for a nonresident alien estate or trust, or
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A resident or domestic fiduciary, or other person, charged with the care of the person or property of a nonresident individual may be required to file an income tax return for that individual and pay the tax (Refer to Treas. Reg. 1.6012-3(b)).
NOTE: If you were a nonresident alien student, teacher, or trainee who was temporarily present in the United States on an "F,""J,""M," or "Q" visa, you are considered engaged in a trade or business in the United States. You must file only if you have income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc.
Claiming a Refund or Benefit
You must also file an income tax return if you want to:
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Claim a refund of overwithheld or overpaid tax, or
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Claim the benefit of any deductions or credits. For example, if you have no U.S. business activities but have income from real property that you choose to treat as effectively connected income, you must timely file a true and accurate return to take any allowable deductions against that income.
B. Which Income to Report
A nonresident alien's income that is subject to U.S. income tax must generally be divided into two categories:
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Income that is Effectively Connected with a trade or business in the United States
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U.S. source income that is Fixed, Determinable, Annual, or Periodical (FDAP)
Effectively Connected Income is taxed after allowable deductions. FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income does not allow deductions to off set it..
C. Filing Requirements
Nonresident aliens who are required to file an income tax return.
D. When and Where To File
If you are an employee or self-employed person and you receive wages or non-employee compensation subject to U.S. income tax withholding, or you have an office or place of business in the United States, you must generally file by the 15th day of the 4th month after your tax year ends. For a person filing using a calendar year this is generally April 15.
f you are not an employee or self-employed person who receives wages or non-employee compensation subject to U.S. income tax withholding, or if you do not have an office or place of business in the United States, you must file by the 15th day of the 6th month after your tax year ends. For a person filing using a calendar year this is generally June 15.
Extension of time to file
If you cannot file your return by the due date, you should request an automatic extension of time to file, which must be filed by the regular due date of the return.
You Could Lose Your Deductions and Credits
To get the benefit of any allowable deductions or credits, you must timely file a true and accurate income tax return. For this purpose, a return is timely if it is filed within 16 months of the due date just discussed. The Internal Revenue Service has the right to deny deductions and credits on tax returns filed more than 16 months after the due dates of the returns.
