There are few acronyms scarier to a non-resdient real estate investor than FIRPTA. By now, most real estate investors, agents, bankers, title companies and just about anyone involved in real estate is familiar with the dreaded FIRPTA. It can make or break deals.So what is FIRPTA?
In a nutshell, FIRPTA laws require that a non-resident selling a home remit 15% of the sales price to the IRS as a prepaid tax so to speak. For example, if a non-resident sells a home for $1 Million, FIRPTA Laws require that $150K be sent in to the IRS at the time of sale!
There is a however a process in place that can reduce or completely eliminate the required 15% withholding.
In order to reduce or eliminate the 15% withholding requirement, a non-resident must first obtain an ITIN (Individual Taxpayer Identification Number), but the IRS does not just assign an ITIN to non-residents. An application must be sent in together with the original or certified copy of the applicant’s passport (notzarized documents are no accepted).
Once the ITIN is obtained, the IRS will process the reduced withholding application. This application will basically explain to the IRS that the 15% FIRPTA withholding will exceed the amount of actual tax due on the sale. Corroborating evidence and calculations are subitted with the application as proof that the 15% FIRPTA withholding is not required.
If accepted, the IRS will mail a withholding certificate either reducing or eliminating the FIRPTA withholding requirement at which point the withholding agent (usually the title company or attroney) will refund the withheld amount to the seller.
Note that by law the wihholding agent must withhold the 15% at the point of sale however, the key difference with the reduced withholding application is that once approved, the 15% is given back to the seller rather than mailed in to the IRS. Once mailed to the IRS, it can take up to a year to get back the money and can prove especially difficult if the withholding agent sends in the money without an ITIN# for the seller.
Dont let FIRPTA stop you from selling your real estate investment. Contact us today for more details and how the rules apply to your particular situation.