Foreign Investment in Real Property Tax Act (FIRPTA) – What You Should Know

FIRPTA - Foreign Investment in Real Property Tax Act

Foreign Investment in Real Property Tax Act (FIRPTA) – What You Should Know

The Foreign Investment in Real Property Tax Act, also known as FIRPTA, is a tax act that has been around since the 1980’s. This act is designed for the government to protect property interests in the United States, therefore regulating foreign investments in US property.

The act is designed to regulate foreign investments in US Real Property Interests (USRPI). We first need to know what US Property is. The IRS explains USRPI as interests that a taxpayer has in real property located in the United States or in the US Virgin Islands as well as certain personal property that is associated with the use of the real property. The term interests includes having shares in a domestic corporation which hold any USRPIs unless the corporation was not a US real property holding company (USRPHC).

The second point to keep in mind is that the act regulates foreign investments on USRPIs defined above. This means that FIRPTA withholding applies to foreign taxpayers (sellers) who dispose of US Real Property Interests (USRPI). Taxpayers who purchase USRPI from foreign taxpayers are required to withhold, starting from February 17, 2016, 15% of the gross proceeds (amount realized) on the disposition. This means that the rate of withholding is applied to the cash being paid, the fair market value of any other property being transferred, and the amount of any liability assumed by the purchaser or which the property is subject to immediately before or after the transfer.

Depending on the type of ownership of a USRPI, different withholding regulations might apply and therefore not limited to the 15% withholding on gross proceeds. The following are some examples of ownership types and withholding requirements:

1) Jointly owned properties, by U.S. and foreign persons, will have the amount realized allocated depending on the capital contributions of each.
2) Foreign corporations will withhold 35% of the gain it recognized on its distribution to shareholders.
3) Domestic Corporations will withhold tax on the fair market value of the property distributed if the corporation is a USRPI and the property distributed is either in the redemption of stock or in a liquidation.

Even though there are various regulations concerning FIRPTA, when it comes to withholding and ownership structures, it is important to realize that withholding taxes on the amount realized is a heavy burden for any foreign taxpayer attempting to sell. This is the case since the taxpayer would have to wait to file a tax return to claim a refund for excess withholding. There are various possibilities to be able to avoid this withholding which includes, but are not limited to:

1) Acquiring a residence that is less than $300,000 where you or a family member live in the residence for 50% of the time in two years broken down into two 12 month segments.
2) If you are disposing your interests in a corporation and that corporation certifies it is not a USRPI where the corporation was not a USRPCH in the last 5 years or it is not considered a USRPI by law.
3) You receive a withholding certificate from the Internal Revenue Service.

Method number three is one of the most frequently used ways to reduce or avoid the FIRPTA withholding. The reasons where this withholding certificate might be issued is if the IRS determines that the amount withheld if greater than the tax liability the seller will incur, the seller is exempt from US tax of all of the gain realized or an agreement with the IRS where security for the tax liability is provided by either the transferee or the transferor. It is important to make sure that a complete application, Form 8288-B, is made before or on the date of the transfer, otherwise, the application would be rejected. Within 90 days of filing, the IRS will then issue the withholding certificate.

Once the seller has applied for the withholding certificate, the IRS will delay the collection and reporting of the tax, under Form 8288-A, by 20 days starting from the date on which it has issued the withholding certificate whether it is approved or denied. Please note that to avoid any penalties or interests, even though you have applied for the withholding certificate, the full amount of the withholding tax has to be held in an escrow account until the certificate is received. The advantage of this is that the seller will receive the money as soon as the certificate, instead of waiting to file a tax return. The buyer will also be certain that he will not incur any future tax liabilities or penalties.

Selling or buying real estate can be quite risky and confusing unless proper guidance is received by your real estate agent, attorney, and CPA. We are available to help you plan your real estate transactions so that you can comply with IRS regulations and reduce your tax risk. Please call us for more details.

Tax Scams: IRS “Dirty Dozen” List for the 2016 Filing Season

WASHINGTON — Aggressive and threatening phone calls by criminals impersonating IRS agents remain a major threat to taxpayers, headlining the annual “Dirty Dozen” list of tax scams for the 2016 filing season, the Internal Revenue Service announced today.

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Tax Scams

The IRS has seen a surge of these phone scams as scam artists threaten police arrest, deportation, license revocation and other things. The IRS reminds taxpayers to guard against all sorts of con games that arise during any filing season.

“Taxpayers across the nation face a deluge of these aggressive phone scams. Don’t be fooled by callers pretending to be from the IRS in an attempt to steal your money,” said IRS Commissioner John Koskinen. “We continue to say if you are surprised to be hearing from us, then you’re not hearing from us.”

“There are many variations. The caller may threaten you with arrest or court action to trick you into making a payment,” Koskinen added. “Some schemes may say you’re entitled to a huge refund. These all add up to trouble. Some simple tips can help protect you.”

The Dirty Dozen is compiled annually by the IRS and lists a variety of common scams taxpayers may encounter any time during the year. Many of these con games peak during filing season as people prepare their tax returns or hire someone to do so.

This January, the Treasury Inspector General for Tax Administration (TIGTA) announced they have received reports of roughly 896,000 contacts since October 2013 and have become aware of over 5,000 victims who have collectively paid over $26.5 million as a result of the scam.

“The IRS continues working to warn taxpayers about phone scams and other schemes,” Koskinen said. “We especially want to thank the law-enforcement community, tax professionals, consumer advocates, the states, other government agencies and particularly the Treasury Inspector General for Tax Administration for helping us in this battle against these persistent phone scams.”

Protect Yourself from Tax Scams:

Scammers make unsolicited calls claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They con the victim into sending cash, usually through a prepaid debit card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls,” or via a phishing email.

Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don’t get the money.

Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.

Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam.

The IRS will never:

Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.
Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
Require you to use a specific payment method for your taxes, such as a prepaid debit card.
Ask for credit or debit card numbers over the phone.
Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

If you don’t owe taxes, or have no reason to think that you do:

Do not give out any information. Hang up immediately.
Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe tax:

Call the IRS at 800-829-1040. IRS workers can help you.
Stay alert to scams that use the IRS as a lure. Tax scams can happen any time of year, not just at tax time. For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

IRS YouTube Video:

Tax Scams – English | Spanish | ASL
Security Summit Identity Theft Tips Overview – English
Be Careful When Using Wi-Fi – English
Update Your Password Regularly – English