In this article, we are going to answer your questions about FIRPTA.
– What does FIRPTA relate to?
– FIRPTA what is a foreign person
– Does FIRPTA relate to real estate property?
– When does FIRPTA affect the buyer and seller of real estate property?
– How is FIRPTA calculated?
– Can you avoid FIRPTA withholding / what is FIRPTA exemption?
– How to get FIRPTA withholding back
You may also be interested to know more about IRS Capital Gains Tax when selling US assets, so be sure to click that link to understand more.
A step by step guide of how to understand and avoid FIRPTA
1 – Sell a US-based asset
2 – Notify the buyer that you are either a resident, resident alien or non-resident alien
3 – Pay the 15% FIRPTA if you are a foreigner / non-resident alien within 20 days of the closure of the sale
4 – Calculate and pay the Capital Gains Tax on your 1040 tax return on 15th April
5 – Claim back the overpaid FIRPTA as required
6 – Think about the HMRC UK Capital Gains Tax upon selling a foreign asset, if you are British
What does FIRPTA relate to?
As British expat tax experts, we know that assets will be sold in the US from time to time. We also know that there are tax issues that the British people may face when selling US assets. One for the biggest issues faces by the British when selling a US-based real estate property investment is FIRPTA.
Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was enacted to ensure that foreign sellers of US assets do not get away from paying tax to the IRS.
The amount deducted from the proceeds of the sale is 15%. Please note that the FIRPTA 15% tax rate is not based on the capital gains rather than the net proceeds from the sale.
FIRPTA what is a foreign person?
As mentioned above, the IRS enacted the FIRPTA in 1980 to target foreign individuals that may leave the US and sell their assets without paying tax. However, we need to be careful about the interpretation of foreign. In the eyes of the IRS, a foreign person is an “Alien”. An Alien does not hold a US passport, green card, nor a US citizen.
A British person would not be considered to be a “foreign person” if they are living in the US, which is known as a “Resident alien”.
A foreigner is a British person that no longer resides in the US, which is known as a “Non-resident alien.”
A foreign person may have to pay the 15% FIRPTA tax if they sell a US-based asset. There are ways of avoiding FIRPTA as we will go through later in this article.
A British person that is living in the US, known as a resident alien, will not need to pay FIRPTA. More on this later.
How does FIRPTA affect the buyer and seller of real estate property?
The FIRPTA 15% tax rate is the responsibility of the seller. However, the buyer has to pay FIRPTA if they do not identify the seller as a foreign person who should pay this tax. It is, therefore, vitally important that the buyer and seller communicate effectively during the sales process.
How is FIRPTA calculated?
FIRPTA tax of 15% is taken from the net proceeds of sale being:
– The cash paid, or to be paid (principal only);
– The fair market value of other property transferred, or to be transferred; and
– Less any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.
I am an American, and my spouse is a non-resident alien. Can I avoid paying FIRPTA?
As you may now understand that FIRPTA is a tax that is applied to foreign persons at the 15% tax rate. The fact that you are married as an American to a foreign person means that FIRPTA still has to be applied to the sales proceeds.
An example of how much FIRPTA may cost
David, a British expat, leaves the US. He sells an investment real estate property. The financials are below:
$300,000 sales price of the property (net of legal and other sales fees)
($150,000) less mortgage value
$150,000 is the money that David should receive
However, we now need to deduct 15% for FIRPTA.
$150,000 sales proceeds from the above
($22,500) FIRPTA at the 15% tax rate
$127,500 net cash received from the sale
FIRPTA forms and payments need to be posted to:
Internal Revenue Service Center
P.O. Box 409101
When does FIRPTA need to be paid?
The 15% FIRPTA withholding tax needs to be paid with the completed Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests within 20 days of the sale closure.
Can you claim back the FIRPTA tax?
We have written an article on the subject of IRS Capital Gains Tax when selling a US-based asset. You would calculate the difference between the money paid on FIRPTA and compare that against the capital gains tax liability. You may reclaim FIRPTA if it is more than the capital gains tax liability on the submitted 1040 tax return.
How to avoid FIRPTA withholding / what is FIRPTA exemption?
There are many ways in which you can avoid paying FIRPTA when selling a US-based asset as a British citizen.
The buyer of the US real estate property uses the property as a home for 50% of the time to avoid FIRPTA.
Please do note that this FIRPTA exemption only applies to real estate properties with a value of $300,000 or less.
FIRPTA does not need to be paid, strangely, if the buyer wishes to buy the property and use it as a home. The buyer has the intention of buying the real estate property as a home for them and their family for at least 50% of the time.
The property cannot be used as a real estate property investment. There may be times that rental income may be earned from the real estate property, but this cannot be for 50% of the time owned.
Nor can the property be used as a holiday home where the property is either empty or rented for 50% or more of the time.
The seller certifies themselves as a non-foreigner (Resident Alien) to avoid FIRPTA.
FIRPTA is chargeable to foreigners, which may also be referred to as non-resident aliens. FIRPTA is not chargeable to British citizens that live in the US and submit a 1040 tax return to the IRS.
Non-foreigners (resident aliens) can request from their attorney to wrote an “AFFIDAVIT OF NON-FOREIGN STATUS“. This may be passed onto the buyer so that the 15% FIRPTAS can be avoided.
1031 Exchange – The seller buys replacement assets to the same or greater value than the sales price to avoid FIRPTA
It is possible that the seller uses the proceeds of the sale to purchase replacement real estate property investment. Please note the word is “investment” The buyer should not use this FIRPTA if:
– The property sold is a home
– A replacement real estate property is a home
– The replacement real estate property is not in the US
– A replacement asset is not lower than the gross sales price of the sold real estate property investment.
A 1031 exchange means that the money you obtained from the sale is reinvested. Not only does this mean that FIRPTA may be avoided but so to is Capital Gains Tax
Do you have an ITIN?
In order for you to submit a 1040 tax return to the IRS, you will need to obtain an Individual Tax Identification Number (ITIN). You can obtain an ITIN number by completing a W7 form, which with some ID may be taken to the IRS.
Within a few months, you will then be provided with an ITIN number. Couples need to be made aware that each person that needs to submit a tax return will require their very own ITIN.
Other useful articles that you may be interested in
Now that you have read this article be sure to read more about
A special note for those that need to submit a UK tax return to HMRC
Not only do you need to think about US tax payments to the IRS, but you need to consider whether or not you have to pay tax in the UK too.
You may need to pay tax based on [enter subject] to HMRC in the UK.
You can read more about US and UK taxes on Optimise Accountants website, whom that focus on helping real estate investors save tax in the UK.