Form 8288
The Foreign Investment in Real Property Tax Act of provides that a foreign person’s gain on the disposition of a U.S. real property interest is "effectively connected" with the conduct of a U.S. trade or business. At closing, in March 2016, Joe’s buyer withholds 15% of the sales price, or $165,000, and submits to the IRS Beneficial Ownership In International Tax Law compliance with FIRPTA. Making things worse, Joe’s lender required full payoff of his mortgage at closing requiring Joe to come out of pocket.
Often, people find it difficult to ascertain who is a foreigner and what exceptions apply. The person selling the property must be either a United States citizen or a green-card holding resident alien if he or she desires to get exemption from FIRPTA withholding. So what warrants FIRPTA affidavit and what occurs when it’s made available? Once the person selling the property provides the buyer a completed affidavit, the buyer is no longer responsible for the withholding.
The rate still is 10 percent for real property sold after this date if the amount realized does not exceed $1,000,000 and the buyer uses the property as a personal residence. If seller believes they do not have any tax liability, they may be able to obtain an exemption. One example would be if they purchased the property at a higher price and now have a capital loss on the property.
Withholding must be done in case the buyer chooses not to sign the form. Let’s now take a detailed look at when is FIRPTA affidavit required. Under FIRPTA, the required withholding tax amount cannot be more than the total tax liability.
The seller must indicate if they are a foreign person for purposes of the FIRPTA tax. This will ensure that the appropriate questions and investigations are made and the required forms signed to avoid any surprises at the closing table. FIRPTA imposes the liability on the buyer to collect and pay the FIRPTA tax. The buyer is regarded as the "withholding agent" for the collection of the FIRPTA tax and is required to withhold a percentage of the sales price paid to the seller.
In order to pay less than ten percent withholding or installment amount, a buyer or seller may apply for a withholding certificate. The withholding certificate they may apply for is IRS Form 8288-B. The certificate is issued ninety days following receipt of application. Furthermore, under penalties of perjury, the buyers need to sign an affidavit that implies that he or she fulfills the exemption requirements. In order to report the sale and pay any income taxes due on the sale’s profit, the seller needs to file a U.S income tax return even though he or she may be exempt from the ten percent withholding.
There are times when the maximum tax liability is less than the 10% required withholding. In such a case, the regulations set by the IRS offer a procedure in the form of a certificate called a withholding certificate to agree to an amount less than the set 10% withholding. This agreement between the transferor and the IRS can only be made if the transferor applies for a withholding certificate from IRS. The form 8288-B must be submitted to the IRS after being filled properly with all details required.
In order to obtain an exemption, they would complete IRS form 8288B (application for Exemption/Withholding Certificate). This form can be submitted by the seller prior to closing or at closing to the title company so it can be sent to the IRS. If seller is simultaneously applying for an ITIN, these forms should be sent together. HARPTA is a withholding tax on sales of Hawaiʻi real property by non-resident persons. Often, there is confusion as to who is a foreign person and what exceptions appertain.
However, the FIRPTA affidavit must clearly state that the person selling the property isn’t a foreigner. Even if a loss on sale is incurred, the IRS requires the buyer to withhold 10% of the gross sales price. In case the buyer does not withhold, he or she will be held legally responsible for the tax. A FIRPTA affidavit stating the seller isn’t a non-resident alien for United States income taxation purposes must be signed by the seller at closing. The main purpose of this affidavit is to safeguard the buyers.
What are the situations and things that warrant FIRPTA affidavit? When a foreigner sells a property in the United States, FIRPTA imposes income tax on it. The main reason of enacting FIRPTA was to minimize lost capital gain tax revenue from the sale of real estate by foreigners . Under perjury penalties, buyers require signing a FIRPTA affidavit that clearly states that they fulfill the requirements of the exemption. Furthermore, to report sale and make payments related to any incomes taxes due on the profit of the sale, sellers require filing United States income tax return even if they quality for the 10% withholding exemption.
In practice, the funds are collected from the seller’s proceeds at closing and remitted by the closing company on behalf of the parties. Under FIRPTA, if you buy U.S. real estate from a foreign person, you may be required to withhold 10% of the amount realized from the sale.
Now that we are on the topic of exceptions from FIRPTA withholding, it is important that we know what a withholding certificate is and what purpose it serves. According to the FIRPTA laws, the amount of tax to be withheld should not, under any circumstances, exceed the tax liability of the seller or transferor.
In order to be exempt from the FIRPTA withholding, the sellers must be either a resident alien with a green card or a United States citizen. When is FIRPTA affidavit required and what happens when it’s made available? The buyer is set free from the withholding requirement once the seller provides the buyer a completed FIRPTA affidavit which states that the seller isn’t a foreign entity or individual. Now that we’ve covered everything related to withholding certificate, it’s time to look at when is FIRPTA affidavit required? An affidavit must be signed by the buyer that states that the purchase price is not more than $300,000 and that the buyer intends to take up residence in the property.
