Top 7 Questions about FIRPTA

Top 7 Questions about FIRPTA

1.   What is F.I.R.P.T.A.?

F.I.R.P.T.A. is an acronym for Foreign Investment Real Property Tax Act.  In 1980 the United States Congress enacted the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) in response to widespread avoidance of U.S. taxes upon the sale of real property by foreign persons.  A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations which are considered U.S. real property holding corporations.  FIRPTA’s objective was to ensure at least one level of taxation for the sale of real estate by foreign persons.  Thirty years later, FIRPTA has evolved as more complex holding structures for acquiring and dispossessing real estate have emerged.  FIRPTA is a withholding, it is not a tax.

FIRPTA Question Property Guiding2.  What are the withholding requirements?

Foreign sellers are required to deduct and withhold 10% of the amount realized on a transfer of real estate.  It is important to note that the withholding is not imposed on the seller’s gain, but on the total amount of the conveyance.  As a result, a situation may arise where a seller realizes no gain or realizes less than a 10 % gain at closing resulting in a shortfall of cash at the closing table.

3.  Who is responsible for a FIRPTA withholding?

The withholding responsibility under F.I.R.P.T.A. is imposed on the transferee/buyer, not the transferor/seller, of the real estate.

4.  What is the purpose of withholding 10%?

Real estate withholding is a prepayment of anticipated tax due on the gain of the sale of a U.S. real property interest.  It is not an additional tax.  Any difference between the amount paid and the amount owed is refunded to the seller when a tax return is filed.

5.  Is there an alternative to a 10% FIRPTA withholding?

Because the 10% withholding obligation often exceeds the actual amount of tax that a seller may be responsible for on the gain, sellers are permitted to apply to the IRS for a “withholding certificate”.  The withholding certificate will adjust the withholding obligation to zero, if an exception applies, or to the amount of actual tax liability generated from the sale.

6.  How and where is the F.I.P.T.A. withholding paid?

The buyer must complete IRS Form 8288 and Form 8288-A and remit them, along with the payment to the IRS at the address shown on Form 8288.

7.  What is the settlement agent’s role with regards to F.I.R.P.T.A.?

Generally as part of the transaction the settlement agent will assist in facilitating the process.  The IRS Rule requires the transferee/buyer to determine if withholding applies and, if so to remit the withholding to the IRS.  If the buyer has determined F.I.R.P.T.A. withholding applies, the buyer and seller may mutually instruct the settlement agent to deduct the 10%, gather the applicable forms and remit them to the IRS on their behalf.

Title Junction is a full service real estate title company serving the area of Fort Myers, Cape Coral and the entire state of Florida since 2005. The company handles a number of real estate title services for both commercial and residential properties. Employees of Title Junction can also act as a witness in courtesy closings as well as an escrow agent or a notary public.

Please contact Jennifer Ferri of Title Junction, LLC for further information @ 239-415-6574 or www.title-junction.com

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Posted on August 23, 2013, in Title and tagged , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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