FIRPTA is an acronym that stands for Foreign Investment in Real Property Tax Act. FIRPTA is a federal law that governs taxation and withholdings when a “foreign person” sells real estate in the US.
Foreign persons are not typically subject to US income taxes and they are not taxed on most capital gains items, including real estate. FIRPTA compels a foreign seller to file a US tax return and pay capital gains tax once a property is sold.
A foreign person is defined by the IRS as any person that is not a “U.S. person.” “U.S. persons” are defined by the IRS as citizens and resident aliens.
To qualify as a resident alien, you must meet at least one of the following three criteria:
- You are considered “lawful permanent resident” of the US at any time during the relevant calendar year. Lawful permanent residents are “green card” holders who are authorized to live permanently in the US.
- You pass the “substantial presence test,” which is being present in the US for all of the days in the current year (you must be present in the US for at least 31 days in the current year), one-third of the days within the first preceding year, and one-sixth of the days within the second preceding year added together. If the sum is equal to or greater than 183, then you pass the substantial presence test.
- You meet the requirements to make a “first year election.” Subject to other requirements, you may qualify as a resident alien if you were present within the US for a period of 31 consecutive days followed by presence within the US for 75% of the remaining days in the calendar year.
How much of the seller’s closing proceeds are held back? If you meet the IRS’ definition of “foreign person” and FIRPTA applies to your sale, depending on the sale price, you can expect either 0%, 10%, or 15% of the closing proceeds from your sale to be held back and either sent to the IRS or held by the closing agent until the IRS determines the exact tax amount.
0% – No withholding is required when the sales price is $300,000 or less and the buyer signs an affidavit stating they intend to use the property for personal purposes at least 50% of the time the property is occupied for the first two years immediately after closing.
10% – A withholding of 10% is required if the sale is between $300,000 to $1,000,000 OR the property is not going to be used by the buyer for personal use for at least 50% of the time the property is occupied for two years after closing.
15% – A withholding of 15% is required if the sale is over $1,000,000 OR the property is not going to be used by the buyer for personal use for at least 50% of the time the property is occupied for two years after closing.