Reducing FIRPTA withholding from 15% to 10%: Guide for Non-Residents Selling Real Estate in the US

Navigating the U.S. tax system can be complex, particularly for non-residents engaged in real estate transactions. One common area of confusion involves the Foreign Investment in Real Property Tax Act (FIRPTA). Enacted in 1980, FIRPTA requires buyers of U.S. real property interests from non-residents to withhold a portion of the sales amount for tax purposes. This guide aims to simplify the complexities surrounding FIRPTA, with a particular focus on how non-residents can reduce the usual 15% FIRPTA withholding to 10%.

What is FIRPTA Withholding?

The main purpose of FIRPTA is to ensure non-residents pay taxes on gains they realize from selling U.S. real property. To achieve this, the law mandates the buyer to withhold up to 15% of the total sales amount and remit it to the Internal Revenue Service (IRS). The withheld amount acts as a deposit against the taxes due on the sale’s profits.

The Path to Reducing FIRPTA Withholding

The standard FIRPTA withholding rate is 15%, but certain situations allow this to be reduced to 10%. This reduction can have significant financial benefits for the non-resident seller. The key to reducing the withholding lies in understanding the conditions under which the IRS permits it.

How to Reduce FIRPTA Withholding to 10%

The IRS permits the reduction of FIRPTA withholding to 10% if the sales price of the property is between $300,000 and $1,000,000, and the property will be used by the buyer as a residence. For the property to be considered as the buyer’s residence, they must have plans to occupy it for at least 50% of the number of days it is in use during each of the first two 12-month periods following the transfer date.

In this case, the buyer or their agent should withhold 10% of the entire amount realized (sales price), instead of the typical 15%.

Application for Reduced FIRPTA Withholding

To seek a reduced FIRPTA withholding, sellers must file Form 8288-B, “Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests,” with the IRS. This form should be filed as soon as possible after closing the sale because it can take up to 90 days for the IRS to process this application.

Even if the 8288-B form hasn’t been approved by the closing date, the withholding amount can still be held in an escrow account. Once the IRS approves the application, the funds will be released from escrow and the reduced withholding amount will be sent to the IRS.

Conclusion

Reducing FIRPTA withholding from 15% to 10% can lead to considerable savings for non-resident sellers of U.S. real estate. Understanding the conditions and processes involved is crucial to take advantage of this benefit. Due to the complexities of the U.S. tax system and FIRPTA, non-resident sellers are encouraged to engage with tax professionals knowledgeable about FIRPTA. An expert can guide you through the process, help you with required paperwork, and optimize your savings. Knowledge is power, and in the realm of U.S. real estate transactions for non-residents, this power can translate into significant financial benefits.

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