This article was written by Mr. Ron Webster, who practiced law on Marco Island, Florida, and reposted by Kelly Johnson, who is a Broker-Associate & Realtor in Orlando, FL.
FIRPTA ia an acronym for the Foreign Investment Real Property Tax Act. It’s purpose is to assure that capital gain, if any, is paid before funds can be removed outside the taxing jurisdiction of the United States. As a matter of law, 10% of the gross sales price must be withheld by the purchaser of property acquired from a foreign person, unless there is an exemption from the tax.
When applicable, FIRPTA withholding tax is paid directly to the I.R.S. within 20 days of the real estate transfer unless exemptions apply of a withholding certificate is applied for prior to or up until the date of closing.
The present capital gain rate is 15% of the net proceeds realized upon sale (18.8% and 23.8% for certain high income levels). All of the initial acquisition costs together with any capital improvements are totaled to create the “basis”. All expenses of sale are subtracted to determine the net proceeds. If the net proceeds are greater than the basis Sellers will be taxed on the profit in the United States.
This tax rate varies at the present rate of 15% (or 18.8%/23.8% based upon income) if the property is held individually or held in a Land Trust to as high as 34% Federal/ 5.5% State for an effective tax rate of 39.5% if held in the name of the corporation. In addition, there are further tax considerations upon the sale that could result in double taxation when the profit is reported in the foreign investor’s home country.
The I.R.S. now requires foreign property owners to obtain a U.S. Taxpayer Identification Number in advance in order to lease, sell or finance U.S. real estate without punitive tax consequences. However, there may be certain exception to withholding and submitting 10% of the gross sales price.
A). SELLING A RESIDENCE FOR $300,000.00 OR LESS
If a foreign person sells a U.S. residence for $300,000.00 or less and the purchaser intends to occupy the property for residential purposes (although not necessarily the buyer’s principal residence), the sale is exempt from FIRPTA withholding. For purposes of clarification this exception will apply even if the Buyer only uses the property for 30 days a year, provided he does not intend to rent for more than 30 days. Nonetheless, the Seller must report the sale to the I.R.S. and be responsible for taxes that may be due.
B). 1031 LIKE KIND EXCHANGE
If the property is being transferred in exchange for another U.S. property then the transaction may qualify for an exemption from FIRPTA as a non-recognition transaction. However, the foreign seller, must designate the new property to be purchased within 20 days of closing (as opposed to 45 days for U.S. Citizens). NOTE: Although this is beneficial to most foreign sellers, it does not benefit Canadians as Canada Revenue Agency does not recognize1031 Exchanges and the full tax will be due in Canada following the sale.
C.) WITHHOLDING CERTIFICATE FOR REDUCTION OR EXEMPTION
With the present capital gain rate of 15% (18.8% and 23.8% for high level incomes) most often the foreign seller’s FIRPTA tax liability will be less than the amount required to be withheld. A foreign seller may apply for a reduction in the amount to be withheld pursuant to the withholding certificate
procedure. Since the I.R.S. has 90 days to respond to such an application, the request should be submitted as early as possible prior to closing to utilize this special escrow procedure.
Under this procedure, the withholding tax is not required to be submitted to the I.R.S. within 20 days of closing but rather they can be retained by the closing agent and disbursed immediately upon obtaining a withholding certificate or letter of reduction rather than applying for and obtaining a refund from the I.R.S. Our office is extremely well versed in this process and can handle the procedure without the need to engage third parties.
D.) RENTAL INCOME
When foreign investors rent out their Florida real estate they are subject to a withholding tax of 30% of the gross amount of rental income. One way for foreign investors to avoid the 30% gross withholding tax is to file a U.S. tax return and pay tax on the net rental income. The foreign investor is then entitled to a refund for any taxes withheld to the extent the withholding amount exceeds to the tax which is payable.