Facts and Tips for a Successful FIRPTA Closing
Like many Florida Realtors, you probably serve a lot of foreign nationals pursuing investments in Florida real estate. Unfortunately, while the state offers many great benefits and incentives to buyers from all over the world – such as no income tax and a diverse supply of properties – regulations at the federal level are a different story. Perhaps the best known and most onerous example is the Foreign Investment in Real Property Tax Act, a.k.a. FIRPTA or FIRPTA Withholding.
Passed by Congress in 1980, this piece of legislation taxes foreign investors at a rate of up to 15 percent on any profits they generate from the “disposition” of U.S.- based real estate : sales, exchanges, liquidations, gifts, and transfers. Prior to this date, foreign persons – which in legal terms includes non-residents, non-citizen individuals as well as non-U.S. corporations – often did not pay income taxes to the IRS upon the sale of their U.S. real estate (unless they voluntarily opted to file a U.S. tax return).
While FIRPTA in no way prevents foreign nationals from purchasing most types of residential or commercial real estate, the extra costs and additional red tape it imposes can be discouraging to many of your potential clients. Given the international appeal of Miami real estate, this is especially disconcerting for South Florida-based real estate professionals, whose clientele base spans the globe.
But with the expertise and advice offered by Marina Title, you can quickly become a specialist in FIRPTA closings and the most sought-after real estate professional for foreign clients worldwide. Here are some of the critical details you should familiarize yourself with to enhance your value to foreign investors and buyers.
For starters, many types of properties are exempt from FIRPTA: for example, if an individual is receiving or purchasing a U.S. property from a foreigner to use as a personal residence, and the sales price is $300,000 or less, FIRPTA withholding does not apply. The IRS highlights a list of other exceptions to FIRPTA, most of which are nuanced and subject to a variety of complex conditions. Hence before you even list a property, you should consult with a Marina Title real estate attorney to determine if FIRPTA applies.
Next, you should determine what the withholding rate will be on the sale. In addition to the above-mentioned exemption, some sales will be hit with a lesser rate of 10 percent if the sales price is between $300,000 and $1 million and the purchaser intends to use the property as a residence. Any property sold for more than $1 million will be met with the maximum 15 percent rate regardless of whether it will be used as a residence or not. If the buyer intends to live in the property, we will prepare an “Intent To Reside Affidavit” to affirm their intentions and solidify your client’s claim to a reduced or zero withholding rate. Your client will no doubt appreciate your effort to save them money.
Keep in mind that in most instances under FIRPTA, the buyer, their representative, or a settlement officer serves as the withholding agent. While it is incumbent on them to determine if the seller is a foreign person and withhold the funds accordingly, you should nip the issue in the bud by stating to potential buyers in the real estate purchase and sales contract that this is a FIRTPA transaction subject to conditions outlined therein.
As you are no doubt realizing, FIRPTA is an important law for foreign national buyers and sellers. . As a real estate professional, your time and resources are better spent helping your client navigate through all the other aspects of property transactions. Enlist the help of an attorney owned and operated title company like Marina Title to help you identify if your closing comes under FIRPTA and how to make the necessary preparations. As your stalwart partner in all international transactions, we’ll help you become the go-to real estate professional for all foreign clients. Learn more by contacting (305) 901-5628 or [email protected] today!
