What is the purpose of FIRPTA in Florida

What Is the Purpose of FIRPTA in Florida?

Dealing with property taxes is never a pleasant situation, especially when it comes to federal taxes. Foreigners who own real property in the United States are exposed to FIRPTA whenever they need to sell their real estate. 

However, what is the purpose of FIRPTA and why do foreigners selling their real property in the US have to pay the required percentage?

In this article, you will discover what the purpose of FIRPTA is in Florida. 

Understanding FIRPTA – A Look Back in History 

The Foreign Investment in Real Property Tax Act, commonly known by the acronym FIRPTA, is a federal tax law enacted on December 5, 1980. 

Before FIRPTA, foreigners who owned real property in America were often exempt from taxes on the sale of real estate in US territory. In this context, the term foreigner refers to non-US citizens, non-US corporations, and non-resident individuals on US soil. 

The Purpose of FIRPTA in Florida – In Detail 

Since 1981, FIRPTA allows the United States Federal Government to withhold income tax that is owed at the point when a foreigner sells real property located in US territory. 

The legislation was enacted to mitigate the federal government’s loss on capital gain tax by foreign individuals or entities upon the sale of real estate. 

As provided by United States tax law, both domestic and foreign persons are required to pay income tax when disposing of US real property interests. 

US citizens and other domestic individuals/entities are subject to regular income tax, in which such dispositions are included. On the other hand, foreigners are not directly required in the same way. 

Consequently, the US federal government utilizes FIRPTA as a mechanism to collect taxes from foreigners on the sale of US real property interests. 

In this sense, the FIRPTA tax law applies in nearly all real estate transactions, either residential or commercial, in which a foreigner sells a US real property. 

Dealing with FIRPTA in Florida – Going Through the Process 

In case a foreign seller and a buyer close a real estate transaction in Florida, federal law provides that a percentage of the funds obtained in the sale must be withheld and remitted to the IRS. 

As provided by FIRPTA tax regulation, in such cases, the buyer will act as a “withholding agent.” Hence, the buyer will be responsible for holding back the required percentage of the sales price and remit it to the IRS on the seller’s behalf. 

Notice that the amount withheld is not the tax itself. Instead, it is the payment on account of the taxes that ultimately will be due from the seller. Typically, the average percentage required is 15% of the property’s sale price. 

However, in specific situations, the FIRPTA tax rate may be reduced to 10% of the property’s sale price. Plus, some exemptions can be applied depending on each case. 

Typically, the FIRPTA tax may be refunded in part or in full to the seller after the IRS has approved his/her income tax return. 

Explaining FIRPTA in Florida – Real-World Situation

To provide a better understanding of FIRPTA tax law, let us analyze a real-world situation that exemplifies it. 

Rauno is an Estonian citizen who owns a vacation home located in South Florida, but now he wants to buy it to invest in other ventures. 

Bill, a friend of Rauno, agrees to buy his vacation home. However, since Rauno is a foreigner and does not reside in the country, they will have to deal with FIRPTA tax law. In this case, they will have to set aside 15% of the sales prices to pay the tax. 

As a US- resident, and buyer of the real estate, Bill will act as the “withholding agent” in the process. He will be required to withhold 15% of the gross sale’s price and remit it to the IRS within 20 days after the transaction’s closing date.

If Bill fails to make the payment to the IRS on Rauno’s behalf, he may be held accountable and required to pay the owed amount of his own. The amount will be held by the IRS until Rauno files a US tax return.

In case Rauno ends up owing less than what was paid to the IRS in advance, he may get a refund. 

Working with a Title Company is Crucial to Deal with FIRPTA in Florida

If you need to deal with FIRPTA tax law or any other matters associated with real estate closing, seek guidance with Marina Title. Our team has seasoned professionals that will ease the process for you.

Call us today at (305) 901-5628 or send us an email a [email protected] to schedule a consultation.