How Foreign Investors Can Reduce or Eliminate FIRPTA Withholding Upon Sale of U.S. Real Estate
For foreign investors, FIRPTA can make a relatively simple transaction a much more complicated affair and tie up funds that could otherwise be quickly reinvested. What many New York real estate professionals and investors don’t know is that FIRPTA can, in many cases, be minimized or avoided altogether.
What is FIRPTA?
FIRPTA was instituted by the IRS to ensure capital gains taxes were captured from foreign investors that did not file traditional tax returns. FIRPTA requires the buyer of property owned by a foreigner to withhold a percentage of the total purchase price and surrender it to the IRS.
Foreign seller then must file taxes on the sale of the property for the year in which the sale took place. Since the seller is only responsible to pay applicable tax rate on gains received from the transaction and not the purchase price at which the property was sold, any funds paid above the applicable tax rate are refunded during the relevant tax period. Such setup often results in extra funds paid as part of FIRPTA withholding being tied up for an extended period.
The current withholding percentages are 15% for sales of over $1M and 10% for less, with personal residences under $350,000 being exempt. While FIRPTA ensures that foreign investors are contributing their fair share, it can also cause complications and is generally inconvenient because a large chunk of proceeds from the sale is not available to the seller until a much later date. In some cases, it can prevent timely reinvestment, complicate 1031 exchanges, and can cause financial distress.
How Do I Reduce or Eliminate FIRPTA?
For foreign investors, the IRS has created a process that can reduce or negate FIRPTA withholding. By obtaining a Withholding Certificate, a foreign property owner can reduce FIRPTA withholding at the time of sale.
When assisting foreign clients to apply for a Withholding Certificate, we analyze many factors to determine an optimal solution for reducing the withholding amount, including original purchase price of the property, length of ownership, capital improvements, closing costs and location of the seller’s residency.
Further, when scheduling a closing date for the property, it is important to keep in mind that it takes the IRS approximately 90 days to process an application for a Withholding Certificate. If the application is filed before the sale closes but has not been processed yet, the buyer’s attorney or closing agent can hold the FIRPTA funds in escrow rather than delivering them to the IRS.
Every transaction involving sale of U.S. property owned by a foreign person is time-sensitive, unique and subject to FIRPTA reporting and withholding requirements. It is important for a foreign seller of U.S. property to consult with an experienced tax professional and real estate attorney to ensure that the sale transaction is executed efficiently and with minimum or no FIRPTA withholding.
Other ResourcesALL ARTICLES
Max Dilendorf, Esq.
Max Dilendorf’s practice is focused primarily on digital assets, cryptocurrency, and technologies that drive blockchain and related distributive computing networks. An early adopter of virtual currency and its associated legal, financial, and business implications, Max is considered the go-to expert for ...Learn More
Gleb Zaslavsky, LLM
Gleb Zaslavsky’s practice involves investment and startup structuring and support, international and domestic corporate transactions in the blockchain and technology industries, and venture capital.
Gleb assists international and domestic entrepreneurs, businesses, venture investors and startups at ...Learn More
Steve contributes extensive business and problem-solving experience to challenges that may require litigation – or may help avoid it. Indeed, his perspective on litigation is influenced by his experience as a three-time internet start-up CEO.
Steve served on Ronald Reagan’s 1980 presidential campaign ...Learn More
Adam is one of the nation’s leading young whistleblower lawyers. He brings with him a special ability not just to litigate, but to investigate – and understand – complex organizations and transactions. His extensive familiarity with tech issues is built on a computer science degree and work as a ...Learn More
Lindsay Rubel, LLM
Ms. Rubel advises clients on all aspects of federal, state, and international tax matters. She has advised corporations, partnerships, limited liability companies and their owners on the tax implications of a variety of transactions, including acquisitions, dispositions, mergers, reorganizations and dissolutions. ...Learn More
Ivanna has 7 years of law practice in Europe, namely in the field of corporate law, M&A transactions, banking and finance. As a senior associate, she advised local, EU, US and multinational clients with respect to their business activities in Ukraine.
Particularly, Ivanna, together with junior associates ...Learn More
Bari Zahn, Esq.
Bari Zahn has nearly 20 years of experience practicing at global law firms in New York. Bari has represented a broad array of multinational clients on U.S. and cross-border transactions. She has supervised legal teams worldwide and has extensive management experience as the Founder, former CEO and General ...Learn More
Pamela A. Fuller, Esq.
Pamela A. Fuller is a corporate and international tax attorney, with over two decades of experience. She advises a wide range of clients–including private and public companies, joint ventures, private equity and hedge funds, C-Suite executives, private U.S and foreign individual clients, and government ...Learn More