FIRPTA tax withholding for foreign nationals
No matter if you are a listing agent in Naples or a buyer’s agent on Marco Island, the tax withholding law is something every agent should know.
Foreign sellers are subject to FIRPTA (The Foreign Investment Real Property Tax Act). In June 1980, foreign sellers became subject to the capital gains tax on appreciated real property.
The FIRPTA withholding became effective January 1st, 1985, as a tool to ensure payment of taxes to the Treasury Department when a foreign seller conveys real property within the United States.
While the actual tax rate may be individually different and can be checked for with a local tax professional, one thing remains the same for all international sellers: the FIRPTA law makes sure that if one or more individuals sell real estate in the U.S.A. a 15% tax withholding (as of 2018) of the sales price will be triggered.
A foreign corporation that distributes a U.S. real property interest must withhold a higher tax of the gain it recognizes.
To ensure that this tax amount definitely makes its way to the Internal Revenue Service, the buyer is made responsible by the IRS to withhold this percentage of the sales price. He is liable for the transferred property later on if the tax has not been withheld.
The title company as withholding agent has the task to submit the 15% to the IRS within 20 days after closing. When this is done, the seller will have to file a tax return at the end of the year with which the IRS will determine the actual tax debt.
In most cases the 15% withheld is more than what the actual tax debt will be so after the IRS has reviewed and approved the return, they will send the difference between actual tax debt and withheld amount back to the seller and the file is closed.
Any real estate agent in Naples Florida or real estate agent on Marco Island Florida is obliged to inform their client about this law as it is a big part of the contract.
The withholding certificate and the tax ID number
If the seller does not want the title company to transfer the funds to the IRS, he has the option to contact his tax professional or C.P.A. before closing and he will apply for a so called withholding certificate with the IRS. Basically this is an early tax return. If this withholding certificate is applied for in time, the title company is not obliged to send the funds to the IRS within the 20-day period.
The funds are kept in the escrow account until the IRS has reviewed the documents and confirmed the final tax debt. By means of a letter the IRS will then order the title company to send the respective amount to them and return the balance to the seller.
In order for the IRS to record this transaction properly and to make sure the received money is booked accordingly for each party in their system, both seller and buyer need to have a TIN (tax identification number). Should both parties be foreign individuals or companies, trusts, etc. then both will need to apply for the TIN.
Generally the applicant for the tax ID number has to provide a certified passport copy from the home country’s issuing agency and send it as an original to the U.S. tax professional. If this document is not produced, then no tax ID number can be applied for and there may be issues during the transaction and when it comes to recording and tracking the payment to the IRS.
Exemptions within FIRPTA exist for example if the contract price is $300,000 or less and the buyer confirms that he will reside in the property for at least 50% of each year within the next 2 years. Also if a property is owned and sold by a domestic corporation it is exempt.
Conveyances To foreign buyers
Generally, there are no requirements or restrictions for foreign buyers to buy and own real estate in Florida. They are subject to the same laws as U.S. citizens. However, there is a new law that came into existence in 2023. On May 8, Governor Ron DeSantis signed into law Senate Bill 264 (“SB 264”) (codified Fla. Stat. Ann. §§ 692.201-205), which seeks to restrict certain foreign Buyers’ purchases and investments in specific types of real property located within the State.
Effective July 1, 2023, this Florida law prohibits the purchase of certain types of Florida real estate by “foreign principals” from “foreign countries of concern.” Violation of the new law can result in criminal penalties. It is also a crime for a person to “knowingly sell” property in violation of the law.
This was added to the latest contract language:
Conveyances To Foreign Buyers: Part III of Chapter 692, Sections 692.201 – 692.205, Florida Statutes, 2023 (the “Act”), in part, limits and regulates the sale, purchase and ownership of certain Florida properties by certain buyers who are associated with a “foreign country of concern”, namely: the People’s Republic of China, the Russian Federation, the Islamic Republic of Iran, the Democratic People’s Republic of Korea, the Republic of Cuba, the Venezuelan regime of Nicolás Maduro, or the Syrian Arab Republic. It is a crime to buy or knowingly sell property in violation of the Act.
At time of purchase, Buyer must provide a signed Affidavit which complies with the requirements of the Act. Seller and Buyer are advised to seek legal counsel regarding their respective obligations and liabilities under the Act.
If you have a property for sale in Marco Island or Naples Florida make sure you hire the best real estate brokerage to represent you the way you want it!
This information only serves as a general overview about FIRPTA and is not to be considered tax advice. Every international/foreign buyer or seller should consult their tax professional before entering into a sales contract to verify details and make sure they understand individual differences.