By: Amy Gerrish
Selling your home in the U.S.
If you are not familiar with FIRPTA and your obligations to it as a foreign seller, this may hold up your closing.
Disclaimer from Amy: Please consult with your tax advisor or attorney about FIRPTA as my thoughts here are not professional advice on the subject, simply information to help you understand why FIRPTA is important to you when you sell your U.S. property.
FIRPTA stands for Foreign Investments in Real Property Tax Act. It requires that the buyer of your foreign owned US property to withhold 10% of the gross purchase price and send it to the IRS within 20 days of purchase. To get all or a portion of your 10% back, you must file a U.S. tax return.
Are there exemptions so the 10% doesn’t get withheld?
Yes, there are exemptions. All 11 of them are laid out here on the IRS’s Official Website. In order to qualify for an exemption you must apply for a Withholding Certificate. This takes about 90 days for IRS to either approve or deny. You must apply for this exemption PRIOR TO CLOSING on the sale of your US property. Documentation of the sale price and the foreign seller’s basis in the property also must be provided to support the calculation of the 10% FIRPTA withholding and the foreign seller’s final tax on the gain. A copy of the sales contract showing the sale price must be provided to the IRS. This means that, in order to apply for the FIRPTA withholding certificate 90 days in advance of the closing or settlement date of the sale, the foreign seller must have an executed contract for the sale of the property 90 days in advance. This requirement could cause the foreign seller to lose an otherwise willing buyer.. You can see how this 90 days can hold up a closing. US closings generally take about 30-45 days. Another time consuming piece to the FIRPTA puzzle is applying for ITIN. This is a tax ID required to even have BEFORE you file for the Withholding Certificate. Acquiring this number takes another 30-60 days. We like to advise our clients to apply for an ITIN upon purchasing a property, even if you will not sell for years down the road. That is why consulting with an tax advisor/attorney with FIRPTA experience is super important, they can help you with this process and the timelines.
The easiest exemption.
If the buyer you are selling your property to meets all the requirements in the first exemption noted by the IRS, it may eliminate having to deal with the withholding certificate stated above. Consult with your closing attorney/escrow office. You may be able to file what is known as a “FIRPTA Buyer’s Exemption Affidavit.” If your closing attorney/escrow agent gives a green light, this usually can be signed at the closing table which eliminates the need for filing all that stuff with the IRS as stated above.