The Foreign Investment in Real Property Tax Act also known as FIRPTA, was set up so that non resident owners (foreign owners) of US real property met their responsibilities for capital gains tax on any sales made by them.
The flat 15% tax on the gross sales price, means a lot of foreign owners have to wait almost 12 to 18 months before they see this money again (even if they have not made a gain or made a small gain) In 2019 this equates to a gain of $40,000 before the next tier of 15% applies.
There are exemptions in place that allow foreign owners to apply for approval from the FIRPTA unit to reduce the 15% withholding down to zero or substantially less than 15%.
There are two main types:
- If the buyer is a US person, the property is less than $300,000 and they (or a member of their family) will use the property as a residence for at least 50% of the time for each of the first two x 12 month periods following the date of transfer. The buyer has to be an individual.
- If the seller can prove there is no capital gain made or a gain up to $40,000
To apply for the FIRPTA exemption: you must complete an 8288-B and submit this with attachments to the FIRPTA unit at or before closing. The 15% will be held in escrow while the FIRPTA unit approves or rejects the application for reduced withholding. Once the approval or rejection is made (this takes up to 90 days), the escrow agent/title agent will either transfer the funds to you or pay or part pay the balance to the IRS (and provide the withholding tax documents to you).
Where an 8288-B has been rejected by FIRPTA, the only way to apply for a refund is by filing a 1040NR tax return (the year after the sale). If you do not have an ITIN (US Taypayer Identification Number) – one will need to be applied for when filing the tax return*.
The rules are strict and must be adhered to by both the US agents and the buyer. The reason for this is because the IRS passes the liability up the chain to them if you have not paid the correct taxes.
*The ITIN can also be applied for with the appropriate sale documents. Just Breve can assist with all ITIN applications required for both US property and US land sales.
Just Breve is based near London Heathrow/M4/M25 in London.
t: 0208 1444632