Foreign Investor In Real Property Act

Questions About The Foreign Investor In Real Property Act ‘FIRPTA’

Aug 05 2020

In our guide, we will answer all the questions about the Foreign Investor In Real Property Act ‘FIRPTA´. Whether you are a foreign person and want to sell a property, or you want to buy a property from a foreign person, there are many points that you should know.

Questions About the Foreign Investor in Real Property Act: Who Must Comply with FIRPTA?

Although the person who must pay the FIRPTA tax is the seller, the buyer must also play a role in all this. The buyer is in charge of retaining a percentage of the sale price when buying a property from a ‘foreign person’.

However, there are times when this work is not done correctly by the buyer. In those cases, the IRS may hold that person accountable for paying not only the FIRPTA tax, but also interest and penalties. Additionally, the settlement agent may also have penalties for not handling the closing process and documentation properly.

What Are the Requirements of Taxpayer Identification Number?

The IRS has established several requirements that all buyers and foreign sellers of a property in the United States must comply with. It is required the delivery of their taxpayer identification numbers, names, tax returns, among other important IRS documents.

All parties should have taxpayer identification numbers at the time of closing. However, there are scenarios in which the closing can continue without having TINs. Of course, after this process they will have to apply for one, as we will see below:

  • First, we will see what happens if the buyer doesn’t have a TIN. That person will have to send one package with the withholding forms, and another with the application for a TIN. These must be sent to different addresses within 20 days after closing.
  • Now let’s see what happens if the seller does not have it. The buyer will have to submit the withholding forms, leaving the seller’s TIN information blank. After the IRS receives the information, the seller must apply to obtain a TIN.

All About Submitting the Withholding – Do It the Right Way

Usually, funds that have been withheld, along with IRS Forms 8288 and 8288-A, must be forwarded to the IRS. This must be done within a maximum period of 20 days after the closing date.

There are times when these documents are sent to the IRS before the closing date, and the certificate application has not been processed yet at that time. What happens then is that the tax must be withheld, but it does not need to be reported or paid immediately.

However, it should always be kept in mind that after the IRS response has been mailed, this amount must be reported and paid. Again, within 20 days after following that day.

What Should You Do If You Are Faced with Insufficient Proceeds for Withholding in the Middle of a Short Sale?

There are times when the proceeds from the sale have not been enough to withhold under FIRPTA. Unfortunately, the payment of the FIRPTA is based not on the seller’s proceeds, but the sale price. Therefore, that is where the seller might be in trouble. However, some steps can be taken.

The seller can send an application to the IRS requesting an exemption or a reduction of the amount that will be withheld. Like any other process of this kind, the response may take some time. That is why it is essential to touch these topics in advance.

What are the Implications When Less than All Sellers Are Classified As ‘Foreign Persons’?

Even when it is not a single individual who is selling the property, but there are several sellers, each case should be treated separately. In other words, each foreign person will have an amount withheld based on the percentage of ownership they own.

Furthermore, it is important to emphasize that this tax is only imposed on foreign persons. For example, imagine that there are five owners of a property, but only one is a foreign person. Then, the buyer should only withhold this person’s percentage of the required withholding.

Go Beyond Questions About the Foreign Investor in Real Property Act ‘FIRPTA’

Now you know the questions about the foreign investor in real property act ‘FIRPTA’ that you must ask – but you need to go beyond that point. You must receive professional help for FIRPTA transactions – give us a call to (305) 901-5628 or email us to to receive it today.

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