Foreign individuals selling real estate in the United States often face strict tax requirements under the Foreign Investment in Real Property Tax Act (FIRPTA). This law was created to ensure that foreign sellers pay the appropriate taxes on gains made from U.S. property sales. However, there are clearly outlined exemptions that may reduce or remove the withholding obligation under certain conditions.
This guest blog explains how FIRPTA exemption rules work, who qualifies, and how sellers can use them to protect more of their sale proceeds.
What is FIRPTA and Why It Exists?
FIRPTA requires buyers to withhold up to 15 percent of the sales price when purchasing real estate from a foreign seller. This withheld amount is forwarded to the IRS as a deposit toward the seller’s final tax due on any profit made from the sale.
The rule ensures that foreign sellers fulfill their tax responsibilities, even if they leave the country after the transaction. But the law also provides relief for sellers who qualify under specific FIRPTA exemption rules.
When is FIRPTA Withholding Not Required or Reduced?
There are several conditions that allow foreign sellers to avoid or reduce FIRPTA withholding. Knowing these in advance helps both the seller and the buyer avoid delays or surprises during closing.
● Buyer Plans to Use the Property as a Home
If the property is sold for $300,000 or less and the buyer plans to use it as their residence, FIRPTA withholding is not required. The buyer must intend to live in the home for at least 50 percent of the time it is in use during each of the first two years following the purchase.
This is one of the most commonly used exemptions, and it relies entirely on how the buyer intends to use the property. The seller still needs the buyer to provide a signed statement confirming their plans at the time of closing.
● Sales Between $300,001 and $1,000,000 With Residential Use
If the sale price falls between $300,001 and $1,000,000 and the buyer will use the property as a personal residence, the withholding rate can be reduced from 15 percent to 10 percent. If the buyer is not using the home as a residence, the full 15 percent must be withheld.
This option does not eliminate withholding entirely but can still result in significant savings for the seller, especially when combined with proper tax planning.
● Withholding Certificate Based on Actual Tax Liability
Foreign sellers can apply to the IRS for a withholding certificate to request a lower withholding amount. This certificate is granted when the estimated actual tax liability is less than the standard withholding. For example, if the property is sold at a loss or with minimal gain, the seller may not owe any tax, and the IRS may allow the buyer to withhold less or nothing at all.
The application must be submitted as early as possible, preferably before closing. Processing usually takes up to 90 days, so planning ahead is key.
● Certain Corporate Sales May Be Exempt
In some cases, foreign corporations that sell real estate or shares in certain entities may not be subject to FIRPTA withholding. This usually applies when the U.S. property does not meet the legal definition of a U.S. real property interest or when specific ownership tests are met.
These types of transactions are more common in larger investment structures and should always be reviewed by legal and tax professionals.
Risks of Ignoring or Misunderstanding the Rules
FIRPTA withholding rules place responsibility on the buyer to ensure compliance. If the buyer fails to withhold the required amount, they could be held liable for the full tax amount. On the seller’s side, not claiming an exemption they are entitled to could result in losing access to funds for many months while waiting for a refund.
In either case, the consequences can be expensive and time-consuming.
Documentation Makes a Difference
Even when a transaction qualifies for an exemption, the IRS still requires documentation. This includes a signed statement from the buyer if a residence-based exemption applies and a complete FIRPTA Exemption Application or withholding certificate request if the seller is applying for relief.
If the paperwork is incomplete, incorrect, or delayed, the withholding may still happen by default. Working with professionals familiar with these forms and deadlines is the safest route to take.
Wrapping Up
Understanding FIRPTA exemption rules gives foreign real estate sellers an advantage. Whether selling at a lower price point, working with a residential buyer, or anticipating little to no gain on the sale, there are clear strategies to reduce or eliminate withholding.
Sellers can take control of the process by filing a Firpta exemption application early and ensuring all required documents are in place well before closing.
So, reach out to Firpta Tax Returns to review your eligibility and get step-by-step support with your exemption filing.
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