F.I.R.P.T.A. Sale Of U.S. Property By Non-U.S. Resident Owner
U.S. tax law requires that any non-resident alien who sells an interest in U.S. real property is subject to withholding for tax purposes of 15% of the gross sales price.
This is required by the U.S. Foreign Investment in Real Property Tax Act and is referred to as F.I.R.P.T.A.
The withheld amount is required to be forwarded to the Internal Revenue Service (IRS) by the closing agent within 20 days of the closing date.
These funds are held until the IRS is satisfied that all taxes due by the non-resident are paid. The taxes due include tax on income from rentals less applicable costs and capital gains tax.
In order to apply for a refund of the withheld amount you can either:
OPTION 1 - File U.S. tax returns for each year that rental income was generated. Reporting all income and expenses and a final return reporting the sale to recover the balance of cleared funds. With this process, it can take up to eighteen months to get your refund depending on when during the tax year the property is sold.
The most popular option:
OPTION 2 – File 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. By choosing this option, the 15% withholding remains with the closing agent whilst the IRS processes the withholding application and issues a Withholding Certificate for the cleared funds. With this process, it usually takes around 90 days to get your refund.
Please note: applying for and receiving a Withholding Certificate does not eliminate your requirement to file a final U.S. income tax return to report the sale transaction. In fact, when your final tax return is filed you may receive a further refund depending on the number of owners and length of time that the property was held.
The following is 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 tax returns have not been filed in previous years:
- Details of income received and expenses incurred during the year(s) of ownership
- Your U.S. Taxpayer Identification Numbers (ITINs)
If you do not have ITINs:
- Completed Forms W-7 (one per seller)
- Notarized copies of the picture pages of your passports
In order to meet the IRS filing requirements, the FIRPTA submission must be made on or before the day of closing. We recommend that your accountant be contacted as soon as you list your home for sale in order that all requirements are completed in a timely manner.
U.S. tax laws are complex. It is important that you get good tax advice when buying and selling U.S. properties. We recommend that you employ a firm that has extensive international tax experience in the areas of absentee owners of investment properties.