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FIRPTA withholding exemptions in FloridaFIRPTA withholding exemptions in Florida

FIRPTA Withholding Exemptions in Florida – Explained

08 Apr 2021

Any foreign citizen or non-US entity selling real property in the United States is exposed to FIRPTA tax law. This federal law requires the buyer to withhold a percentage of the property’s sales price and remit it to the IRS within 20 days of the closing date. 

 

Nonetheless, there are feasible manners to utterly avoid FIRPTA, or at least mitigate the percentage owed to the IRS. 

 

In this article, you will learn about the FIRPTA withholding exemptions in Florida and how to utilize them in your favor. 

 

The Purpose Behind FIRPTA – Why Was This Federal Law Established? 

 

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted on December 5, 1980, as a way to mitigate the government’s loss on capital gain tax by foreign individuals or entities upon the sale of real estate.

 

Before 1981, non-resident/non-citizen individuals and non-US corporations were often exempt from US tax on the sale of real property located on American soil. 

 

This generated a concern that these foreign individuals or entities were buying real estate in the United States and selling it, presumably on profit, without paying the required tax on the capital gains. 

 

Under FIRPTA, the term “foreign person or entity” refers to any non-resident alien individual, corporation, trust, or foreign estate. 

 

Dealing with the complexities of FIRPTA tax law is not an easy task, which leads several foreign individuals or entities to pay an amount of tax over what is owed to the IRS.

 

Understanding FIRPTA – In Layman’s Terms

 

Given that the concept of FIRPTA is not easy to understand, the following is a fictional situation to demonstrate how it works. 

 

Let us say there is a Portuguese citizen called Maria. Two years ago, Maria bought a vacation home located in Fort Lauderdale, but now she wants to sell the property. After some time, Maria finds a buyer for her vacation home, a US citizen and Florida resident called Julia. 

 

Since Maria is neither a US citizen nor a US resident, both Maria and Julia will have to deal with FIRPTA tax law. FIRPTA is a withholding tax, which means it is an amount of the property sales price that is held back to pay for future taxes. 

 

When Maria is selling her vacation home in Florida, she is earning US-income. Hence, she will need to pay an estimated tax on that income to the IRS. The amount required under FIRPTA will be held by the IRS until Maria files a US tax return.

 

In such a case, Julia will act as the “withholding agent”, being responsible to hold the amount required under FIRPTA and subsequently deduct and remit the funds to the IRS. 

 

If Julia fails to withhold and remit the FIRPTA tax to the IRS, she may be liable for paying the owed amount by herself. 

 

FIRPTA Withholding Exemptions in Florida – Feasible Use Cases 

 

To identify if a FIRPTA withholding exemption is applicable in a real estate transaction, you need to sit down and ask yourself three questions: 

 

  1. Is the seller a foreign individual or entity? 
  2. Is the buyer purchasing a US real property interest?
  3. Is the property being purchased to be utilized as a primary residence for at least half of the next 24 months following the closing? 

In a transaction in which the answer for the three questions above is yes, and the property sales price is $300,000 or less, there is no withholding required. 

 

Another FIRPTA withholding exemption in Florida happens in situations where the transaction is considered a non-recognition transfer. 

 

Commonly, foreign individuals or entities are required to claim the financial gains or losses that occurred during a transaction. Nonetheless, in many situations,  gains or losses associated with a deal are not recognized, which means the transaction proceeds are exempt under FIRPTA.  

 

Also, in situations where the attainment of the transaction amount to zero, the parties are exempt from FIRPTA tax withholding. 

 

Mitigating FIRPTA Withholding in Florida – Withholding Certificate 

 

If your case does not fit any of the categories above, it is still possible to mitigate the amount withheld under FIRPTA with a withholding certificate. 

 

Notice that the application for a withholding certificate is a complex and time-consuming task. Hence, it is crucial to seek legal support with a real estate attorney to facilitate the process for you. 

 

Do You Need Help to Deal with FIRPTA in Florida? – We Have the Solution You Need 

 

At Marina Title, we have a team of expert lawyers that will find the ideal solution for your case. 

 

If you are dealing with FIRPTA in Florida, waste no time with uncertainty. Call us at (305) 901-5628 or send us an email at Romy@MarinaTitle.com to schedule a consultation.

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