Foreign Investment in Real Property Tax Act (FIRPTA) Withholding
U.S. Tax law requires that a non-resident alien who sells an interest in U.S. real property is subject to withholding, for tax purposes, of 15% of the gross sales price (i.e. $45,000 on a property with a sales price of $300,000). The withheld amount is required to be forwarded to the IRS, by the Closing Agent, within 20 days of the date of closing. These funds are held until the IRS is satisfied that all taxes due by the non-resident are paid. In order to apply for a refund you can either:-
- File U.S. tax returns for each year that rental income was received, reporting all income and expenses; file a final U.S. tax return in the year following the year of sale, to report the sale and recover the balance of cleared funds. This process can take up to eighteen months depending on when, during the tax year, the property is sold.
- File prior year tax returns (where required) plus an application for early release of cleared withholding on or before the date of closing. By making this submission, the 10% withholding remains with the Closing Agent whilst the IRS processes the Withholding Application and issues a Withholding Certificate for the cleared funds – usually around 90 days.
Please note that applying for and receiving a Withholding Certificate does not eliminate your requirement to file a final U.S. income tax return to report the sale transaction. In fact, when your final tax return is filed you may receive a further tax refund depending on the number of owners and length of time that the property was held.
In order to ensure a timely release of your funds it is extremely important that the following is obtained PRIOR to closing:-
- Buyer’s names, address and SSNs – if U.S. Citizens
- Buyer’s names, address and ITINs – if non residents
- Or, if the buyers are non residents and do not have ITINs, the buyer’s completed Form W-7 (one per buyer) and authenticated copy of the picture page of their passport(s)
Without this information the Application for a Withholding Certificate and early refund will be rejected. We suggest that you request your Realtor prepare your sales contract contingent upon the buyers providing the above information.