FIRPTA withholding to increase next week

If you work with foreign nationals in your real estate business, be advised that the FIRPTA withholding rate on home sales exceeding $1 million will increase to 15% on February 16.

Also known as the Foreign Investment in Real Estate Property Tax Act, FIRPTA requires foreign persons to pay U.S. income tax on gains made from the sale of real estate in the United States. Home sales that do not exceed the $1 million dollar threshold are subject to a 10% withholding.

There is an exception to the FIRPTA withholding rule. If the sales price is below $300,000 AND the new buyer intends to use the property as a principal residence, then the home sale is not subject to FIRPTA withholding.

The duty of collecting the FIRPTA tax, owed by a foreign national seller, is imposed on the U.S. national buyer The amount that must be withheld can be lowered pursuant to the seller obtaining a withholding certificate from the IRS prior to closing.

In most instances, the settlement agent will actually collect the withholding from the foreign national seller and remit the funds to the IRS on behalf of the buyer. However, the buyer is held legally responsible for the proper withholding and, under the law, the buyer could be liable for any additional withholding tax, penalty and interest if ever challenged by the IRS.

To help you determine when FIRPTA withholding is required, and the rate to withhold, we created a simple flowchart that contains four easy questions. You can view it on our website and download a copy to share with your clients and colleagues.

FIRPTA withholding rate to increase to 15% for sales exceeding $1 million

FIRPTA withholding rate to increase to 15% for sales exceeding $1 million

Starting February 16, 2016, there will be changes to the Foreign Investment in Real Property Tax Act ("FIRPTA").

FIRPTA is a tax law passed in 1981 that requires foreign persons to pay U.S. income tax on the gains they make from selling U.S. real estate.

The duty is on the U.S. national buyer to deduct and withhold a portion of the sales price and report the sale to the IRS. Buyers can withhold less than the statutory amount if they obtain a determination of the specific amount of tax owed by the foreign national using IRS Form 8288-B.

In most cases, the settlement agent is the party that actually remits the funds to the IRS, but the buyer is held legally responsible. Additionally, until the tax is paid in full, the government obtains a security interest in the real property.

The 10% rate will still apply for those transactions in which the property is to be used by the Buyer as a residence, provided the sales price does not exceed $1,000,000, and the existing $300,000 “exemption” remains unaffected. So here are the new guidelines:

  • If the sales price is $300,000 or less, AND the property will be used by the Buyer as a residence (as provided for in the current regulations), no sums need be withheld or remitted.
  • If the sales price exceeds $300,000 but does not exceed $1,000,000, AND the property will be used by the Buyer as a residence, then the withholding rate is 10% on the full amount realized.
  • If the sales price exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the Transferee.
  • Under the law, the Buyer is the withholding agent and is responsible for withholding and remitting the proper amount to the IRS and could be liable for any additional withholding tax, penalty, and interest if their intent is ever challenged by the IRS.

    The current FAR/BAR contract form contains language specifically referring to a 10% withholding. An amendment to the contract for closings scheduled on or after February 16, 2016 should be added to change the potential rate of withholding to 15%.

5 marketing ideas for real estate agents from Close It!™

The best real estate agents are constantly on the look-out for ways to better market themselves to their home buyers.

And while the latest report shows it's 34% more affordable to buy versus rent in the DC metro area, many would-be homebuyers remain on the fence

How can you get these homebuyers off the fence – and then convince them to buy the fence along with the house that comes with it? Here are 5 ways Close It!™ can help you market your real estate business:

1. Follow up with clients by sharing Close It!™ in your email, social media or blogging campaigns. 

You've already got a database of email addresses, Facebook page likes and Twitter followers. Perhaps some of those contacts are would-be homebuyers who aren't quite sure if they can really afford to buy a house. Reach out to them about the only app in the region that calculates a homebuyer's total cash to close. It's a fun and useful tool that lets them crunch the numbers any way they want. 

2. Customize your Close It!™ reports with photo and contact info.

You're already working with several prospective homebuyers who no doubt have lots of questions about how much everything is going to cost in the end. Follow up on last weekend's house tour with a set of HUD-1s custom branded with your professional photo and contact information. Your homebuyers will be impressed when you outline every cost for them down to the penny.

3. Appeal to the foreign investor market.

If you're working in neighborhoods like Georgetown, Foggy Bottom and the West End, it's quite possible you've worked with foreign investors or that you will at some point. Did you know that sellers who do not participate in the U.S. tax system must pay the IRS a tax of 10% of the sales price for all properties over $300,000? A surprise like that at closing could cost you a client, or worse yet, merit you a negative online review. Close It!™ helps you better serve foreign clients by accounting for FIRPTA withholding along with every other nuance of real estate law and tax code for each jurisdiction.

4. Appeal to the first-time homebuyer market.

The first-time homebuyer demographic may make up a smaller share of homebuyers now compared to historic levels, but it's only a matter of time before an influx of millennial homebuyers causes it to explode. And the millennials, more than previous generations, are more likely to look to technology to help them gather information about the process. Be their guide. Keep up with real estate technology, including mobile apps, and share your favorite findings with your millennial homebuyers. Close It!™ is one app homebuyers in the DC metro region in particular will appreciate, but there are many more apps, tools and resources to discover. 

5. Appeal to the move-up buyer market with seller's calculator. 

For buyers in the move-up market, how much house they can afford often depends on how much money they can net from their existing home sale. Introduce those clients to the app that toggles between a net proceeds calculator for the seller side and a cash-to-close calculator for the buyer side. 

Close It!™ is a free iOS and Web app that helps real estate agents, buyers and sellers drill down the costs of buying and selling real estate.

Understanding FIRPTA

Understanding FIRPTA

FIRPTA Withholding:
Tax on non-resident aliens selling real property in the U.S.

The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 authorizes the United States to tax foreign persons who are nonresident aliens selling U.S. real property interests.A U.S. real property interest includes sales of interests in parcels of real property.

Persons purchasing U.S. real property interests (transferee) from nonresident aliens (transferor), certain purchasers' agents, and settlement officers are required to withhold 10% of the amount realized (the purchase/sales price of the real estate going to transferor) and remit that amount to the Internal Revenue Service within 20 days of the transaction.

The rules of FIRTPA changed February 16, 2016 when the withholding rate on properties over $1 million increased to 15%. Read our coverage of the increase of FIRPTA withholding to learn more.

Withholding is intended to ensure U.S. taxation of gains realized on disposition of real property interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer, you must find out if the transferor/seller is a foreign person/nonresident alien. If the transferor is a foreign person/nonresident alien and you fail to withhold, you may be held liable for the tax.

Coverage of FIRPTA:
Definition of "Nonresident Alien" (Foreign Person)

A nonresident alien is defined for federal income tax purposes as an individual who is neither a U.S. citizen nor a resident of the U.S. within the meaning of the Internal Revenue Code. An alien individual is a resident of the U.S. for federal income taxes if he or she:

  • Has been issued a green card (been admitted as a Lawful Permanent Resident in the U.S.) at any time during or prior to the calendar year; or
  • Has maintained a "substantial presence" in the U.S., which means the alien (a) is physically present in the U.S. for 183 days or more during the calendar year or (b) if the alien is physically present in the U.S. for at least 31 days during the current year, the alien may be treated as a resident in the current year by the following calculation:

    1. Each day of presence in the current year is counted as a Full Day;
    2. Each day of presence in the 1st preceding year is counted as 1/3 of a Day;
    3. Each day of presence in the 2nd preceding year is counted as 1/6 of a Day

    If the total of (1) + (2) + (3) is 183 days or more, the alien may be a U.S. tax resident unless the alien files certain required information with the IRS to claim the benefit of any relevant exception.

    If the foreign person is neither a U.S. citizen nor falls within description (1) or (2), he or she is a nonresident alien and is subject to FIRPTA withholding unless an exception applies.

  • Exceptions

    Home Use/$300K Exception - One of the most common exceptions to FIRPTA withholding is that the transferee is not required to withhold tax in a situation in which the transferee purchases real estate for use as his/her home and the purchase price is not more than $300,000. In this case, the transferee or a member of his family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer.

    Withholding Certificate - Another exception from FIRPTA withholding occurs when the IRS issues a withholding certificate. The transferee, the transferee's agent, or the transferor may request a withholding certificate and the IRS will generally act on these requests within 90 days after receipt of a complete application (Form 8288-B), including the Taxpayer Identification Numbers (TINs) of all parties to the transaction.

    Form 8288-B requires a description of the real property interest being sold, the sales price, a calculation of the maximum tax owed, and evidence that the seller has no unsatisfied FIRPTA withholding obligations with respect to the purchase of the real property interest.

    A transferor that applies for a withholding certificate must notify the transferee in writing that the certificate has been applied for on the day of or the day prior to the transfer. If the withholding certificate is obtained, the nonresident alien must file a U.S. tax return for the year of sale and pay the appropriate amount of tax due at that time.

    Please note that if the principal purpose of a transferee's applying for a withholding certificate is to delay remitting the withheld tax to the IRS, the transferee will be subject to interest and penalties.

    Additional exceptions from FIRPTA withholding exist but most involve transactions related to U.S. real property holding companies or the government acquisition of property.

    For additional information about those transactions, applicable forms, the withholding certificate application process, the effects of U.S. income tax treaties with other countries on withholding, and more, please visit

The basics of FIRPTA withholding tax

The basics of FIRPTA withholding tax

When getting prepared for settlement, one of the concerns of every settlement company is whether the seller is affected by the Foreign Investment Real Property Tax Act (FIRPTA). In fact, all settlement companies will require the seller to sign an affidavit stating they are not subject to FIRPTA.

If the seller cannot or will not sign the affidavit, then 10% of the sales price is collected at settlement and paid directly to the IRS by the settlement company.

The rules of FIRTPA changed February 16, 2016 when the withholding rate on properties over $1 million increased to 15%. Read our coverage of the increase of FIRPTA withholding to learn more.

The following are some commonly asked questions with some basic answers.

When is your client affected by FIRTA?

When the property sales price over $300,000 and your client is a foreign person i.e. does not participate in the US tax system.

What does my client need to do?

Apply for an exemption by filing an IRS Form 8288 on or before date of settlement OR pay 10% of the sales price directly to the IRS via the closing agent.

NOTE: If your client does not have a tax identification or social security number, then your client will also be required to file a W-7 form at the time of either filing for an exemption or paying the tax.

How is my purchaser affected by FIRPTA?

If the seller is foreign and does not pay the requisite tax or file for exemption; then your purchaser is on the hook for paying the tax.

NOTE: If both the seller and the purchaser are foreign, your purchaser will be required to file a W-7 form if your purchaser does not already have a tax identification or social security number. Your purchaser’s tax identification number must be on the seller’s form whether filing for exemption or filing to pay the tax.

Can any of the paperwork be filed in advance?

Yes, the requisite forms can be filed as soon as you have a ratified contract. You will need to get the purchaser’s information i.e. SSN, address, etc., in order to do so.

How long does it usually take the IRS to grant an exemption or give a decision as to the exemption?

Typically it takes 90 days to receive a certificate of exemption, partial exemption or non-exemption.

Who usually files the requisite forms?

  1. If the seller is paying 10% of the sales price as part of settlement, then the settlement agent/attorney will file the forms and pay the money directly to the IRS.
  2. If the seller wishes to file for an exemption, then the seller hires the settlement agent, a tax attorney or an accountant to file the forms. There is usually an additional fee to handle the exemption filings.

If you need any further information or need the forms, visit IRS webpage on foreign persons or contact our office.

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