FIRPTA Retention
In order to ensure that a foreigner pays tax on the capital gain obtained from the sale of real estate, the law imposes on the buyer in the real estate transaction the obligation to withhold 15% from the seller (recently increased 10% to 15%) of the sale price of the property. This withheld amount must be paid to the Internal Revenue Service (I.R.S) within 20 days after the sale. Subsequently, the seller will file (the year following the sale) his final tax return. If the amount calculated to pay in this declaration is greater than the 15% withheld during the sale, the seller must pay the difference, and if the amount calculated to pay in the declaration is less than the 15% withheld, then the IRS will refund the seller overpaid. In the case of the sale of a property for an amount equal to or less than one million dollars in which the buyer is going to live in the property, the retention will remain at 10% of the sale price (there will be no increase to 15%) .
It is very important that all parties involved in the sale of a property by a foreigner know and are aware of the scope of this law, since not knowing it can have important tax consequences for both parties ( seller and buyer) and that could significantly impact and affect the outcome of a negotiation. The law places the responsibility for retention on the purchaser of the unit, through the title company that handles the operation. This means that a buyer may become tax liable for amounts not withheld at closing. That is why it is essential that all parties involved in the negotiation are aware of the details of the aforementioned law. Like almost all laws, this law has exceptions, which, if properly understood, can prevent the aforementioned 10% withholding or reduce the amount or impact of such withholding. This article only seeks to generally illustrate tax concepts and is not intended, in any way, to replace advice from a professional specialized in the field such as a real estate attorney or an accountant. We suggest you hire the services of one of these professionals in case of any doubt about it. Here are the most common exceptions:
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Sales price less than $300,000 and the buyer will live in the property.
If the sale price of the property is less than or equal to $300,000 and the buyer of the same is going to live in it for a period of not less than 50% during the next two years, then the 10% withholding is not necessary. . The buyer must sign an affidavit stating the above.
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Seller gives the buyer certification that he is not a foreigner.
If the seller provides the buyer with a certification stating, under penalty of perjury, that he is not a foreign person and that contains the seller’s name, United States tax identification number (ITIN), and address (or office address, in the case of an entity). -
Seller delivers certificate that excuses retention.
If the seller provides the buyer with a withholding certificate from the Internal Revenue Service that excuses the withholding.