FIRPTA Withholding Rate to Change in February 2016

Posted by Team Donovan on Wednesday, January 6th, 2016 at 10:05am.

Thinking about selling your Orlando vacation property?  You should be aware of an upcoming change in the U.S. Foreign Investment in Real Property Tax Act, otherwise known as FIRPTA. 

As of Feb. 16, 2016, any non-resident alien who sells an interest in U.S. real property will be subject to a 15 percent withholding rate on FIRPTA at closing. That is an increase from the current rate of 10 percent. 

The change means that anyone who buys property in the U.S. held by a foreign seller must withhold 15 percent of the gross purchase price. The title company remits the amount to the IRS at closing. The withholding would generally offset any tax actually due from the non-resident alien on the sale and would be eligible for a refund to the extent that the substantive tax was less than the amount withheld. 

You have two options to consider when applying for a refund of the withheld amount:

Option #1 – You should file U.S. tax returns for each year that rental income was generated on the property. The returns should include reporting of all income and expenses, with a final return reporting the sale to recover the balance of cleared funds. This process can take up to 18 months to get your refunding, depending on what time of the tax year the property is sold.

Most sellers prefer this following option:

Option #2 – File IRS Form 8288-B – Application for Exemption from Withholding with supporting documents (including tax returns reporting prior year income and expenses) on or before the date of closing. When you choose this option, the 15 percent withholding remains with the c osing agent while the IRS processes the application and issues a Withholding Certificate for the cleared funds. Sellers will normally receive a refund from this process within 90 days.

** Note: You must still file a final U.S. income tax return to report the sale of your property, even if you apply and receive the Withholding Certificate. Once your final tax return is filed with the IRS, you may be eligible to receive a further refund depending on the number of owners and length of time the property was held.

The following documents are required to file for an early release of cleared FIRPTA withholding:

  • Copy of settlement statement from purchase of property
  • Copy of furniture package invoice or approximate value if included in the purchase price
  • Copies of invoices/receipts for major improvements/upgrades to your property
  • Copies of any prior year tax returns filed to the IRS.

If you have not filed tax returns in previous years, you must also include the following:

  • Details of income received and expenses incurred during the year(s) of ownership
  • Your U.S. Taxpayer Identification Numbers (ITINs)

If you do have ITINs, you must provide:

  • Completed W-7 Forms (one per seller)
  • Notarized copies of your passport picture page 

The FIRPTA submission must be made on or before the day of closing in order to meet IRS filing requirements. We recommend that you contact your account as soon as you list your home for sale in order to be sure that all requirements are completed in a timely manner.

U.S. tax laws are complex. It’s important that you obtain expert tax advice when buying and selling U.S. properties. Team Donovan recommends that you hire a firm with extensive international tax experience in the areas of absentee owners of investment properties.