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How Foreign Real Estate Investors Can Avoid FIRPTA

The Foreign Investment Real Property Tax Act is a piece of legislation that regulates the sale of United States properties by foreign owners whether entities or individuals.  The buyer of a property from a foreigner needs to set aside 10% of the price if the seller is an individual or 35% if the seller is an entity.  Within 20 days of the sale, the IRS is supposed to be notified of the withheld amount and the transaction, if that’s not done then the buyer might be responsible for the sellers tax, which no one wants to have happen.  The seller is supposed to file a tax return and pay their capital gains tax on the amount of the difference of the sales price and the purchase price plus renovations.  You can see more here.

The withholding needs to happen whether or not the property was sold at a loss.  The amount withheld is sent to the IRS and in theory, the seller then submits a tax return along with their capital gains tax and then the buyer is supposed to get a refund on the amount they withheld.  That is what happens about 90% of the time.

There are a few ways to avoid or at least reduce this FIRPTA tax:

  • The seller should be a U.S. citizen or hold a green card
  • A foreign seller can avoid the tax if they sell the property for $300,000 or less
  • A foreign seller can avoid the tax if the buyer signs an affidavit stating that they are going to use the property as their primary residence for at least a minimum period of two years after the sale
  • The foreign seller can apply for a Withholding Certificate if they have a (TIN). It must be done at the time of the sale.  If they don’t have a TIN they can apply for one, and a withholding certificate can take 90 days to be approved and issued.  There can always be delays in processing times though so, in any case the withholding amount will be held in escrow until the IRS takes action.

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Capital gains taxes are due at the time of sale for a property and are taxes based on the profit of the property.  The rates at which properties are taxed capital gains usually depends on how long the property was owned prior to sale.  Those properties that are held long term are taxed at lower rates than those that were owned very short term, the amount you pay can also adjust based on the amount of ordinary income you earn.  There is no good way to get out of paying capital gains on a property sale, but there are a few things you can do to try and minimize what you owe:

  • Be sure you deduct any renovation expenses from your profit; you will pay the tax based on the profit minus renovation expenses.
  • 1031 exchanges allow a seller to defer paying the capital gains taxes if they are using the profits to turn around and buy another property. It must meet certain requirements and be a like-property but you can potentially indefinitely postpone paying capital gains tax with this method.  There are a few other ways to use a 1031 exchange with a property that isn’t totally like kind.  Those are called deferred exchanges and mixed exchanges and come with their own sets of regulations that need to be met.

As always, we suggest using a professional to help you navigate all of the tax code laws and regulations.  The good news is, there are some ways to help defer or minimize the amount of taxes that need to be paid when you have to pay capital gains or withhold part of the amount of the sale when dealing with a foreign investor. 

Please,  contact us with your questions in relation to Foreign Investors.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized in Tax Planning for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution and Offshore Strategies. You can email him to fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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