As a real estate professional specializing in working with buyers and sellers from the UK here in Tampa Bay, Florida. I find the biggest shock sellers from the UK get when they sell their property is the 15% withholding at closing, better known as FIRPTA or Foreign Investment Real Estate Property Tax Act. Most people have worked with a realtor to buy their property that inadvertently forgot to let them know that there would be this tax liability when it became time to sell. Unfortunately, most realtors who are anxious to sell their customer a property and not accustomed to working with UK or foreign buyers are not always familiar with this very important law.
Sellers are often shocked when they find out that 15% of the total sales price is going to be withheld and sent to the Internal Revenue Service until they have filed the necessary paperwork to hopefully claim all or some of it back. Here is a brief overview of FIRPTA and your tax liability when you sell:
FIRPTA is the United States’ Foreign Investment in Real Property Tax Act. When a foreign national transfers real property, the IRS withholds 15% as an estimated tax payment. This estimated tax payment is withheld regardless of the individual’s annual tax liability. This withholding is applicable on every real property transaction involving a transferor (seller) who is not a United States citizen or resident and may also apply to a Limited Liability Company (LLC) where there are non-U.S. members.
Essentially, when an individual sells a property in the United States, they are required to file a U.S. income tax return to report the sale. This is where the actual tax on the sale is calculated.
FIRPTA requires that any individual who is selling a property in the U.S. that is not a U.S. citizen will have 15% of the gross sales price withheld at closing. This 15% withholding must then be remitted to the Internal Revenue Service (IRS) within 20 days after closing.
This 15% withholding is considered a deposit that will be applied to the actual tax which is calculated when filing a U.S. income tax return. Upon comparing the deposit and the actual tax, if the tax is less than the 15% withholding, the remainder is refunded to the seller. If the difference is greater than the 15% withholding, the seller must then remit the balance to the IRS.
No withholding is required provided that the sale price is $300,000 or less and the buyer (including family members) intends to use the property as a personal residence for at least 50% of the time it is in use for a period of 24 months after closing. Days that the property is not in use are excluded from this 50% calculation.
The buyer must be willing to sign an affidavit as to their intentions under penalties of perjury. The seller must still file a U.S. income tax return reporting the sale and pay all applicable income taxes.
Sales exceeding $300,000, whether at a profit or at a loss, do not qualify for an exemption
The 15% withholding rate may be reduced back down to the prior 10% rate provided that the sale price not exceed $1,000,000 and, as with the exception above, the buyer intends to use the property as a personal residence as described. In this case as well, the buyer must sign an affidavit under penalty of perjury expressing their intentions.
Another important piece of information to keep in mind is that, when the actual tax on the sale is significantly less than the 15% withholding, the seller can apply for a withholding certificate from the IRS. This, then, allows for a reduction in the amount withheld at closing from 15% down to 10% of the gross sales price.
To clarify why this is crucial, let’s look at an example. An individual bought a property for $700,000. He is later only able to sell the same property for $600,000. In this case, because the seller is incurring a significant loss on the sale of the property, no income tax is payable on the sale. Still, the 15% withholding is applicable and $90,000 will be withheld on the transaction.
However, in this situation, the seller may submit an application to the IRS documenting that the sale will result in a loss. Provided that the application is made no later than the date of closing, no withholding is required.
Because it generally takes the IRS 90 days to issue the withholding certificate, closing may take place before the certificate is issued. If this is the case, the 15% is deducted at closing. However, instead of remitting the withholding to the IRS, the closing agent is able to hold the money in escrow until the withholding certificate is issued. Upon receipt of the certificate, the agent is then able to remit the reduced withholding amount, if any is applicable, and return the balance to the seller.
When you sell your property through us, there are several ways we can help to make this process a lot less painful! We can help plan your sale so that you may not have any money withheld at closing. If it is required there will be withholding, we can put you in contact with tax professionals that are experts in minimizing your tax liability while helping you comply with complicated international legal requirements.
By Kevin Welland – Real Estate Professional – Luxury & Beach Realty
*We always recommend you consult a tax professional if you are subject to FIRPTA withholding.
Sellers are often shocked when they find out that 15% of the total sales price is going to be withheld and sent to the Internal Revenue Service until they have filed the necessary paperwork to hopefully claim all or some of it back. Here is a brief overview of FIRPTA and your tax liability when you sell:
FIRPTA is the United States’ Foreign Investment in Real Property Tax Act. When a foreign national transfers real property, the IRS withholds 15% as an estimated tax payment. This estimated tax payment is withheld regardless of the individual’s annual tax liability. This withholding is applicable on every real property transaction involving a transferor (seller) who is not a United States citizen or resident and may also apply to a Limited Liability Company (LLC) where there are non-U.S. members.
Essentially, when an individual sells a property in the United States, they are required to file a U.S. income tax return to report the sale. This is where the actual tax on the sale is calculated.
FIRPTA requires that any individual who is selling a property in the U.S. that is not a U.S. citizen will have 15% of the gross sales price withheld at closing. This 15% withholding must then be remitted to the Internal Revenue Service (IRS) within 20 days after closing.
This 15% withholding is considered a deposit that will be applied to the actual tax which is calculated when filing a U.S. income tax return. Upon comparing the deposit and the actual tax, if the tax is less than the 15% withholding, the remainder is refunded to the seller. If the difference is greater than the 15% withholding, the seller must then remit the balance to the IRS.
No withholding is required provided that the sale price is $300,000 or less and the buyer (including family members) intends to use the property as a personal residence for at least 50% of the time it is in use for a period of 24 months after closing. Days that the property is not in use are excluded from this 50% calculation.
The buyer must be willing to sign an affidavit as to their intentions under penalties of perjury. The seller must still file a U.S. income tax return reporting the sale and pay all applicable income taxes.
Sales exceeding $300,000, whether at a profit or at a loss, do not qualify for an exemption
The 15% withholding rate may be reduced back down to the prior 10% rate provided that the sale price not exceed $1,000,000 and, as with the exception above, the buyer intends to use the property as a personal residence as described. In this case as well, the buyer must sign an affidavit under penalty of perjury expressing their intentions.
Applying for a Withholding Certificate When Selling at a Loss
Another important piece of information to keep in mind is that, when the actual tax on the sale is significantly less than the 15% withholding, the seller can apply for a withholding certificate from the IRS. This, then, allows for a reduction in the amount withheld at closing from 15% down to 10% of the gross sales price.
To clarify why this is crucial, let’s look at an example. An individual bought a property for $700,000. He is later only able to sell the same property for $600,000. In this case, because the seller is incurring a significant loss on the sale of the property, no income tax is payable on the sale. Still, the 15% withholding is applicable and $90,000 will be withheld on the transaction.
However, in this situation, the seller may submit an application to the IRS documenting that the sale will result in a loss. Provided that the application is made no later than the date of closing, no withholding is required.
Because it generally takes the IRS 90 days to issue the withholding certificate, closing may take place before the certificate is issued. If this is the case, the 15% is deducted at closing. However, instead of remitting the withholding to the IRS, the closing agent is able to hold the money in escrow until the withholding certificate is issued. Upon receipt of the certificate, the agent is then able to remit the reduced withholding amount, if any is applicable, and return the balance to the seller.
When you sell your property through us, there are several ways we can help to make this process a lot less painful! We can help plan your sale so that you may not have any money withheld at closing. If it is required there will be withholding, we can put you in contact with tax professionals that are experts in minimizing your tax liability while helping you comply with complicated international legal requirements.
By Kevin Welland – Real Estate Professional – Luxury & Beach Realty
*We always recommend you consult a tax professional if you are subject to FIRPTA withholding.
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