Do not let the FIRPTA Withholding process hold you back from a potentially lucrative real estate deal—hire an expert Real Estate Attorney with experience handling this federal requirement.
Florida real estate has long been an alluring asset to investors worldwide, holding strong through some of the most difficult economic times. From oceanfront condos to expansive lots of vacant land, there is something for everyone in the Sunshine State.
However, regardless of your property of choice, one thing almost every foreign investor will face is FIRPTA, or the Foreign Investment in Real Property Tax Act. Thanks to the complexities of this otherwise obscure tax law, most investors will see a dent in their return on investment—unless they hire a Jurado & Associates Real Estate Attorney who understands the ins and outs of the FIRPTA process.
What is FIRPTA?
Enacted by Congress over 40 years ago, FIRPTA imposes income tax on foreign persons transferring of U.S. real property interests. The law’s broad language denotes its wide reach: It applies even when the seller is not receiving any proceeds from the sale (such as in a short sale scenario) and regardless of whether the foreign seller is a natural person or a legal person (such as a corporation or LLC).
However, the foreign seller is not the only one burdened by FIRPTA requirements: In a qualifying transaction, it is the buyer’s obligation to withhold up to 15% of the gross proceeds that the seller receives from the sale. Hence any property deal where FIRPTA may be implicated can be off-putting to either party, adding yet more complexity and expense to what may already be a complicated transaction.
Fortunately, Jurado & Associates has worked with sellers and investors from around the world, and therefore has proven experience meeting compliance requirements of FIRPTA.
Understanding the FIRPTA Withholding Process
Under FIRPTA, the buyer of a U.S. property owned by a foreign person must withhold the necessary percentage of proceeds and file Form 8288, U.S. Withholding Tax Return, with the U.S. Internal Revenue Service (IRS). This obligation is also known as a “Section 1445 Withholding,” after the relevant portion of the Internal Revenue Code. This is typically done by the buyer’s closing agent within twenty days of the real estate closing.
Additionally, either the buyer or foreign seller can file Form 8288B, “Application for a Withholding Certificate,” which reduces or eliminates the withholding requirement for qualifying transaction. This is ideal for foreign sellers who will receive little or no gain from the sale of the property, or where the withholding amount is much higher than the actual tax liability. An 888B Withholding Certificate is also used by foreign sellers taking advantage of the “1031 exchange,” an IRS rule allowing applicants to avoid capital gains taxes on eligible real estate transactions.
Understandably, sellers who may qualify for reduced FIRPTA withholding usually do not want to send a large withholding amount to the IRS just to discover they could have kept more or all their funds—especially since they would have to wait for the following tax year to get back their refund.
Another potential complication is that many foreign nationals do not have a social security number, which is required for filing forms with the IRS. This means the foreign seller must apply for an Individual Taxpayer Identification Number (ITIN) to serve as an alternative. The ITIN should be applied for on or before the time the Withholding Certificate package is submitted, or else the process will be further delayed.
Why Timing is Crucial?
As with anything tax related, timing is of the essence: While the FIRPTA Withholding Certificate should be filed early enough to get your funds as soon as possible, it cannot be submitted until a valid real estate contract has been executed—only then can the application be filed.
Like Form 8288, an application for a Withholding Certificate can be filed after closing. However, if it is submitted on or before the contractual closing date, the funds will be held in escrow while the application is being processed by the IRS. If everything is in order, the IRS will issue the Withholding Certificate to the buyer or their agent authorizing the release of all or part of the withheld funds back to the seller.
If a Withholding Certificate application is not submitted to the IRS before the closing date, the withheld process must be sent to the IRS within twenty days of the closing, and the seller will ordinarily have to file a U.S. income tax return the following year to get any refund back.
However, a timely filed FIRPTA Withholding Certificate means the seller can get back their funds roughly three to four months.
Another critical part of the process is coordinating with all the parties involved: Since the withheld funds must be submitted to the IRS by the buyer or the closing agent, the foreign seller must make it known that they will apply for an 8288B Withholding Certificate. Due to the twenty-day deadline after closing, buyer/closing agent will hold the withheld funds for only a certain number of days before sending them to the IRS, failing to notify the seller since they did not know an 8288B application was being sought. This mistake may greatly delay the return of funds to the seller.
Hire a Real Estate Attorney with FIRPTA Experience
If FIRPTA seems daunting and onerous, you are not alone: Thousands of buyers and sellers alike struggle to make sense of its complex requirements. Given the careful timing, coordination, and attention to detail involved, errors and delays are all too common.
That is why the Real Estate Attorneys at Jurado & Associates are well-versed in this highly specialized area. Based in the globally popular real estate market of South Florida, our firm has handled numerous FIRPTA transactions, helping buyers fulfill their withholding requirements and sellers receive their 8288B Withholding Certificate as soon as possible.
Our team also has experience serving as closing and escrow agent, handling all the key aspects of the transaction. We keep all parties in the loop while making sure that IRS regulations are followed with the utmost efficiency and timeliness—so that all parties can leave the closing content and confident.
If you’re a buyer, seller, or realtor potentially or currently involved in a FIRPTA transaction, contact me today at (305) 921-0976 or email [email protected] to schedule a consultation.