A Quick Guide to the FIRTPA Withholding and How Marina Title Can Help
If you are like many Florida Realtors, a significant number of your clients are foreign investors. To better serve this fast-growing and lucrative client base, you will need to familiarize yourself with one of the biggest challenges facing foreign nationals involved in U.S. real estate: The Foreign Investment in Real Property Tax Act, better known as FIRPTA.
Before FIRPTA was passed by Congress in 1980, foreign persons and corporations could sell or transfer their U.S. real estate without having to pay any income tax to the IRS. Congress enacted FIRPTA so that foreign nationals would be subject to U.S. income taxation laws on the sale of real property. To ensure that foreign investors pay income taxes, FIRPTA requires buyers who are purchasing a real property interest from a foreign seller to withhold 15% of the purchase price and submit that to the IRS. The FIRPTA Withholding applies to any individual who is a non-resident or non-citizen, as well as any entity that is not incorporated in the U.S.
One common misconception is that the IRS places the responsibility to withhold on the seller – it is actually the buyer who is legally liable if the withholding does not take place. Furthermore, many believe that FIRPTA is a tax. FIRPTA is only a withholding – the actual tax due from the foreign seller may be higher or lower than the withholding amount. It is the seller’s responsibility to file a tax return to determine what the actual tax obligation is. If the withholding amount is higher than the actual tax liability, the seller will receive that difference back from the IRS.
Although FIRPTA does not restrict foreign nationals from purchasing residential or commercial real estate, it does impose additional costs and red tape on top of the many other requirements affecting real estate transactions. More likely than not, many foreign clients will be unfamiliar with this requirement and put off by their subsequently reduced proceeds. That is why it is important for foreign investors to know about FIRPTA early on, including the ways to avoid FIRPTA or be exempt from it.
Considering the growing attractiveness of South Florida real estate around the world, Realtors who work with foreign nationals cannot afford being unprepared to handle the FIRPTA Withholding. That is where Marina Title comes in with comprehensive, up-to-date FIRPTA expertise. We have read the fine print of FIRPTA Withholding requirements and know everything there is to know about how to comply in a timely and efficient manner. We can even save your client’s money through a variety of legal but often little-known exemptions.
For example, there are several kinds of properties and transactions that are totally exempt from FIRPTA, such as when the buyer or the buyer’s immediate family plans to use the property as a personal residence and the sales price is $300,000 or less. Moreover, a lesser rate of 10 percent will apply under the same conditions if the property is sold for any amount between $300,000 and $1 million.
There are about a dozen other exceptions set forth in the IRS guidelines, most of which are complex and subject to various conditions. A property sold or transferred as an interest in a domestic corporation is exempt, provided that any class of stock of the corporation is traded regularly on a formal securities market.
These finer details are best left to the experts of Marina Title. Our diverse and internationally-oriented team has ample experience serving as a withholding agent for FIRPTA transactions. As a real estate professional, your time and resources are better spent helping your clients navigate through all the other aspects of property transactions. Let us deal with FIRPTA and other title and settlement issue so that you can become the go-to specialist to all foreign investors. To learn more about what Marina Title can do for you, contact (305) 901-5628 or email [email protected] today!
