How to get your "FIRPTA" refund back?

The US offers many incentives to foreign real estate investors: NO visa required and generous tax deductions! However, at the time of sale, a foreign investor might be surprised by the “FIRPTA” tax on his closing statement.  Below the FIRPTA mechanism explained and how to get your tax refund back as quickly as possible!

What is FIRPTA?

The Foreign Investment in Real Property Tax Act (FIRPTA) was passed in 1980 and taxes  foreign persons who sell real property. The act functions as a  “prepayment” of tax that is anticipated to be due on the sale. The prepayment the year of sale ensures  that the IRS will collect any tax due  - in the event the foreign national does not report his sale voluntarily to the authorities the year after the sale.

What individuals  are subject to FIRPTA?

A foreign “person” under FIRPTA includes the following individuals:

1.    An individual who does not hold U.S. citizenship
2.    An individual who does not hold permanent residence (Green card ) – to read more on The Green card: https://www.kbfinancials.biz/la-carte-verte-am-ricaine--us-green-card-.html
3.    An individual whose presence in the United States does not the Substantial presence test.
To read more on Substantial Presence Test:  https://www.kbfinancials.biz/s-jours-aux-etats-unis---la-r-gle-des-183-jours.html

What entities  are subject to FIRPTA?

A foreign “person” under FIRPTA includes the following entities:

1.    A Single Member LLC (disregarded entity) – because its activity is taxable at the level of its member.
2.    A Multiple member LLC (Partnership) – if the LLC has not paid its §1446 withholding tax during the year of the sale.
3.    A Corporation (USRPI - US Real Property Interest ) – if at least 50% of its assets are real estate.
To read more on the type of entities in the US: https://www.kbfinancials.biz/la-consultation---structures-juridiques.html

What is the FIRPTA withholding rate?

The FIRPTA withholding rate is 15% for sales made by individuals and 21% for sales made by entities.

Who is responsible for withholding the tax?

The  buyer of a U.S. real property is responsible for withholding FIRPTA from the sales price, filing forms 8288 &8288-A and remitting the tax to the IRS within 20 days of date of the sale. The buyer is subject to paying the tax and to penalties if he fails to withhold properly and timely.

How does the seller recover the FIRPTA withholding?

The year AFTER the sale, the foreign individual files a US tax return (Form 1040NR) which calculates the tax actually due on the realized capital gain . Any over-payment of tax is refunded. To find out more about the taxation of capital gains - https://www.kbfinancials.biz/l-imp-t-sur-les-plus-values--capital-gain-tax--.html

Important: to recover the FIRPTA refund, the seller must hold a US tax identification number (ITIN) – To read more on how to obtain an ITIN -  https://www.kbfinancials.biz/itin-services.html

Are there exceptions to FIRPTA?

There are many exceptions that exempt the foreign seller from FIRPTA.  The 2 most common exceptions are:

1.    Future use of the property by the buyer = when the buyer uses the property as his primary residence and the sale price is less than $300K.
2.    Sale through an exchange 1031 (or “like kind exchange”) = when the seller reinvests immediately in a similar real estate property (“non recognition transaction”)- To read more about 1031 exchanges: https://www.kbfinancials.biz/the-1031-exchange--how-to-defer-taxes-when-selling-real-estate-.html
3.    Other exceptions = https://www.irs.gov/individuals/international-taxpayers/exceptions-from-firpta-withholding

Without proper planning, recovering the FIRTPA refund can be a VERY LONG process. As soon as you are considering selling or purchasing a real property, contact Karine Bauer EA at Kbauer Financials LLC to assist you. As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a tax professional. Karine Bauer, EA is an IRS Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. Karine is also a Quickbooks Pro-Advisor and a member of the Association of Chartered and Certified Accountants (ACCA). She is an experienced tax professional with more than 20 years of international experience.

Bear in mind the date of this article as tax laws change overtime.

Updated February 25th, 2022