Understanding FIRPTA Withholding: Tax Implications for Foreigners
If you're considering selling property in the U.S. as a foreigner, you should be aware that there are special tax rules that apply to the sale. Specifically, U.S. real estate sales by foreigners are subject to withholding requirements under the Foreign Investment in Real Property Tax Act (FIRPTA). But who is considered a foreign seller and how much is the withholding? Are there ways to reduce or eliminate the withholding?
In this article, we answer these questions to give you a clear picture of the tax implications of selling your U.S. property.
- FIRPTA is a U.S. tax law that requires buyers to withhold a portion of the sales price of U.S. real property from foreign persons
- A foreign person is any person who is not a U.S. citizen or a U.S. resident alien
- To reduce or eliminate the FIRPTA withholding, a foreign seller can apply for a reduced withholding certificate
What is FIRPTA?
FIRPTA is a U.S. tax law that was enacted in 1980. FIRPTA requires that a buyer withhold a portion of the sales price of U.S. real property from a foreign person. The withholding is intended to ensure that the U.S. government is able to collect tax on the sale of U.S. real property by foreign persons.
Note that the withholding amount is not the actual tax due. It's more like a deposit to ensure the foreign seller will pay the tax. In most cases, the tax owed will be less than the FIRPTA withholding (see how to calculate the capital gain tax below).
Who is subject to FIRPTA withholding?
FIRPTA withholding only applies to foreign persons, so it's important to understand how the term is defined. A foreign party under FIRPTA is any person who is not a U.S. citizen or a U.S. resident alien. Some examples of U.S. resident aliens include:
- Foreign nationals who have been granted a green card, also known as a lawful permanent resident card.
- Foreign nationals who meet the substantial presence test, which is a test that determines whether a foreign national has spent enough time in the United States to be considered a resident alien for tax purposes.
- Foreign students who are attending school in the United States on a student visa.
- Foreign workers who are working in the United States on a work visa.
- Foreign diplomats who are living in the United States on a diplomatic visa.
If you're still unsure if you're a foreign person, consider consulting a tax professional or Internal Revenue Service (IRS) Publication 519, U.S. Tax Guide for Aliens.
What is a FIRPTA affidavit?
If there is any doubt whether the seller is a foreign person, the buyer or settlement agent may request the seller to sign a FIRPTA affidavit at closing. That's because under Section 1445 of the Internal Revenue Code, the buyer of real property is responsible for the withholding if the seller is a foreign person.
With a FIRPTA affidavit, also called an Affidavit of Non Foreign Status, the seller certifies under oath that they are not a foreign seller. The affidavit is a simple form that provides the seller's name, U.S. taxpayer identification number, and address. The FIRPTA affidavit must be signed by the seller and notarized.
Do I need a taxpayer identification number to sell real estate?
No, a foreigner selling real estate in the U.S. is not required to have a taxpayer identification number (TIN). However, if you don't have one it’s advantageous to apply for one in connection with the sale for the following reasons:
Reduced withholding tax. If a foreign seller has a TIN, they can apply for a reduced withholding certificate, which could reduce or eliminate the FIRPTA withholding.
Easier to file taxes. If a foreign seller has a TIN, it will be easier for them to file their U.S. tax return.
How to obtain a taxpayer identification number
There are two types of taxpayer identification numbers: Employer Identification Number (EIN): this is issued to businesses, trusts, and other entities. Individual Taxpayer Identification Number (ITIN): this is a number issued by the IRS to individuals who are not eligible for a Social Security Number (SSN).
You can apply for an ITIN from the IRS by mail, private delivery service, in person at an IRS Taxpayer Assistance Center, or through an acceptance agent. An acceptance agent can help you complete and file Form W-7.
You need a valid reason for obtaining an ITIN. Fortunately, selling a U.S. property is a valid reason for obtaining an ITIN. On the W-7 application, this is called 'Dispositions by a foreign person of U.S. real property interest—third-party withholding.' Supporting documentation for this reason includes:
- A completed Form 8288, Form 8288-A, or Form 8288-B; and
- A copy of the real estate sales contract, Settlement Statement (HUD-1), or Closing Disclosure
That means that to justify this reason for getting an ITIN, you need to be far enough in the process to at least have a signed sales contract with a buyer. You can find more information about obtaining a TIN on the IRS website.
How to calculate capital gains tax on property sales for non-residents
Regardless of the FIRPTA withholding amount, the actual taxes owed are calculated based on the capital gain or loss from the sale. Capital gains are calculated by subtracting the cost basis of the property from the sales price. The cost basis is the amount of money that the seller paid for the property, plus any improvements that they made to it. The sales price is the amount of money that the seller received for the property.
For example, if a foreign seller bought a property for $100,000 and made $20,000 in improvements, their cost basis would be $120,000. If they then sold the property for $150,000, their capital gain would be $30,000.
The capital gains tax rate for a non-resident foreigner selling U.S. real estate depends on how long they held the property. If they held the property for less than one year, they will be taxed at the short-term capital gains rate. Short-term gains are taxed as ordinary income according to your tax bracket.
If they held the property for one year or more, they would be taxed at the long-term capital gains tax rate.
You can check the long-term capital gains tax table below. Find the bracket that represents your filing status and taxable income. The corresponding tax rate — 0%, 15%, or 20% — would be the tax on your capital gain.
Long-term capital gains tax rates in 2023
How can I claim a refund of FIRPTA withholding?
If the FIRPTA withholding exceeds the tax actually owed, then a foreign person has options to eliminate the withholding or request a refund. Here they are listed in order from fastest to slowest way to get your money back:
- Don't pay FIRPTA withholding - apply for a Certificate of Withholding BEFORE Closing. You can file an application to reduce or even eliminate the withholding using IRS Form 8288-B. You'll have to provide supporting calculations that show the actual tax you expect to owe on the sale. You must file the application after the property goes under contract but before the closing date. Typically, it takes 90-120 days to process the withholding decision. In the meantime, the withheld funds may need to be held in escrow pending the IRS’s decision. Once the certificate is obtained, the escrow agent can release the withheld funds.
- Get an early refund - apply for a Certificate of Withholding AFTER Closing. In this case, the funds are withheld at closing, but you apply to have them released before waiting for the end of year tax return filing. This option uses the same Form 8288-B as well as IRS Form 843 “Claim for Refund.” The application must be sent to the IRS within 20 days after closing.
- File a U.S. Tax Return. If you're not in a hurry for the refund, you can request it when filing your US tax return. If the capital gain tax owed in the tax return is less than the FIRPTA withholding, then the IRS will refund you the difference.
FAQs for foreigners selling property
Does FIRPTA apply to land sales under $300,000?
Yes, FIRPTA applies to all vacant land sold by non-resident foreigners, regardless of the sale price. There is a FIRPTA exception when the sales price is $300,000 or less and the buyer will use the property as a residence. But there is a specific exclusion for vacant land, even if the buyer plans to build a residence.
Is the FIRPTA withholding rate 10% or 15%?
The withholding rate under FIRPTA used to be 10%. With the PATH Act of 2015, the FIRPTA withholding rate increased to 15% for most cases. To qualify for the 10% withholding rate, the sales price cannot exceed $1,000,000 and the buyer must intend to use the property as a residence. The lower withholding rate is not available for vacant land sales.
If I file a File an 8288 form with the IRS, do I still need to file a tax return?
Whether you need to file a tax return in addition to filing Form 8288 depends on whether you have any other U.S. taxable income. If you do not have any other U.S. taxable income, you may not need to file a tax return.
If you are a nonresident alien, you may not be required to file a tax return if you do not have any U.S. taxable income.
Even if you are a resident alien, you may not be required to file a tax return if your U.S. income is below a certain threshold.
If you are unsure whether you need to file a tax return, we recommend consulting a tax advisor to determine your specific tax filing requirements.
Does FIRPTA apply to US citizens living abroad?
Sellers who are U.S. citizens or U.S. permanent residents (green card holders) are generally exempt from FIRPTA withholding.
Can you sell property in the U.S. without a real estate agent?
Yes, you can sell property in the U.S. without a real estate agent. There are a few different ways to do this, including:
Selling your property yourself. This is known as a "For Sale By Owner" (FSBO) sale. FSBO sales can be a good way to save money on commissions, but they can also be more time-consuming and require more work than selling with a real estate agent.
It may not be practical to sell FSBO as a foreigner. For example, buyers will want to view the property. Arranging someone to meet potential buyers may be possible, but complicated.
One exception that may work well for a piece of land is to sell the property to a neighbor. You could send letters to nearby property owners before considering other options for selling the property.
Selling your property to a cash buyer. An alternative is to sell to a company that specializes in buying properties for cash. These companies can typically close on a sale quickly and make the transaction easy from start to finish.
If you're looking for a company that can make a cash offer on your vacant land, we would be happy to help. We have purchased land from international sellers and can guide you through the process. We can also close on a sale quickly. To learn more, consider requesting a cash offer today.
Conclusion - selling property in the USA
Selling property in the U.S. as a foreigner can be complicated, and it's important to be aware of the special tax rules that apply. In this article, we reviewed who is considered a foreign seller, FIRPTA withholding rules, and ways to reduce or eliminate the withholding. We have also explained how to calculate the capital gains tax on property sales for non-residents.
Please consult your financial advisor, accountant, lawyer, or tax specialist. This article is for informational purposes, and is not tax or legal advice.