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On the surface, the Foreign Investment in Real Property Tax Act seems simple: foreigners who sell a piece of U.S. real estate must pay a 10% or 15% tax.
Still, as always, the details are what matter. There are also a lot of details, exceptions, and things that make things more complicated. NAR says that from April 2018 to March 2019, 8% of all homes sold in the U.S. by people from outside the country were in Texas. During the same time period, 10% of all homes bought in the U.S. by people from outside the country were in Texas. That’s 18,310 homes that will be sold again, which will make FIRPTA questions come up.
FIRPTA puts a tax on the capital gains that foreigners make when they sell their interests in U.S. real estate. At the time of sale, the money has to be taken out, and the payment has to be sent to the IRS within 20 days.
Most of the time, it’s up to the buyer to make sure the IRS gets its money within 20 days. This is usually handled by the title company, but that doesn’t mean the buyer doesn’t have to act as the withholding agent.
Most of the time, the FIRPTA withholding agent Florida must fill out IRS Forms 8288 and 8288-A, where they enter the amount that must be withheld at 10% or 15%.
The 10% withholding rate is for homes sold for more than $300,000 but less than $1 million that the buyer plans to live in as their main home. No matter how much the property sells for, a 15% withholding tax will be added if the buyer doesn’t plan to live in it as their main home. There is an exception to this rule if the buyer plans to live in the property as their main home and the sales price is $300,000 or less.
With proper planning and the help of a document called a “withholding certificate,” withholding can often be reduced or even eliminated. This document can be used by the seller to show that the taxes owed from the sale of real property will be less than the amount withheld by FIRPTA. For this claim to be true, there must be evidence to back it up.
But be careful: the seller must fill out IRS Form 8288-B to get a withholding certificate before or on the day of closing. If the withholding certificate is given to the buyer before the sale, the FIRPTA withholding certificate application can use it to get no withholding or less withholding. If, however, the withholding certificate is not approved at the time of the transaction, the IRS lets the buyer put the withholding in escrow until the IRS either approves or denies the seller’s withholding certificate.