DACA, FIRPTA and the Substantial Presence Test: Immigration Status Is Not Tax Status
What happens when a DACA recipient sells U.S. real estate? Does FIRPTA withholding automatically apply because the seller is not a U.S. citizen or lawful permanent resident?
Not necessarily.
DACA and FIRPTA arise under different areas of federal law. DACA concerns immigration, while the Foreign Investment in Real Property Tax Act (FIRPTA) imposes federal tax withholding requirements when a foreign person disposes of a U.S. real property interest.
But the two can intersect when a DACA recipient sells U.S. real estate.
For FIRPTA purposes, the critical question is not simply the seller's immigration classification. The analysis must also consider whether the individual is treated as a U.S. resident alien for federal tax purposes, including under the Substantial Presence Test (SPT).
Immigration status and federal tax residency are not the same thing.
Why DACA Can Create Confusion
DACA does not confer U.S. citizenship or lawful permanent resident status. But that does not, by itself, establish that a DACA recipient must be treated as a foreign person for FIRPTA purposes.
A separate federal tax residency analysis may be required.
This distinction can easily be missed when someone sees "DACA," "non-citizen," or the absence of a green card and assumes that FIRPTA withholding necessarily follows.
It may not.
What If There Is a Spouse or Co-Owner?
The analysis can become more complicated when spouses or co-owners have different immigration circumstances.
For example, one seller may be a DACA recipient, while a spouse or co-owner is not a DACA recipient, U.S. citizen, or lawful permanent resident, but has nevertheless been physically present in the United States for many years.
In the case of a DACA recipient, there may be a more readily established documentary history associated with that individual's presence in the United States. Those same circumstances should not be assumed to exist for the spouse or other co-owner.
That can present a significantly more complicated factual and professional challenge.
Federal tax residency must be determined separately for each individual seller. The FIRPTA determination applicable to one spouse or co-owner should not simply be carried over to another.
The Substantial Presence Test
The Substantial Presence Test is one method used under federal tax law to determine whether an individual is treated as a U.S. resident alien for federal income tax purposes.
The test considers physical presence in the United States under statutory rules that extend beyond simply asking whether someone was present for 183 days during the current year. Other circumstances and exceptions can also affect the determination.
For that reason, the SPT should not be reduced to a casual headcount of days or an assumption based upon where someone appears to live.
Why It Matters Under FIRPTA
FIRPTA generally requires a buyer acquiring a U.S. real property interest from a foreign person to withhold and remit a portion of the amount realized to the IRS, unless an applicable exception, exemption, reduction, or other provision applies.
If an individual is properly classified as a U.S. person for federal tax purposes, the FIRPTA analysis can be fundamentally different.
The issue therefore affects not only sellers, but potentially buyers and the professionals responsible for administering the closing.
Don't Start With the Immigration Label
A useful principle is simple:
Immigration status is not tax status.
The question should not merely be:
"What is this seller's immigration status?"
The more relevant FIRPTA question may be:
"How is this seller classified for U.S. federal tax purposes?"
Where federal tax residency is uncertain, that determination should ideally be addressed before closing, while the parties still have an opportunity to determine the appropriate FIRPTA treatment.
FIRPTA Refunds, LLC provides professional FIRPTA transaction assessments and related services for sellers, buyers, closing professionals, attorneys, and other parties involved in U.S. real estate transactions.
The objective is not to assume that FIRPTA applies—or that it does not. It is to determine the appropriate treatment under the applicable federal tax rules and the facts of the transaction.
If you have a transaction involving these or similar circumstances and need assistance reviewing the FIRPTA implications, contact FIRPTA Refunds, LLC. We would be happy to discuss the situation with you.
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