Buying and selling a piece of real estate in the US is already a pretty involved and often complex process. When you add in the extra level of difficulty of buying a property owned in the US by a foreign citizen, then things ratchet up in difficulty level for sure. In that case, the oft dreaded FIRPTA rules kick in and you, the buyer, may be on the hook for up to 15% of the sale amount as income tax for the seller. But, don’t despair! We can help walk you through the process and answer some of the questions you may have. If, after reading this article you still want to know more or you have additional questions, please give us a call at: 303 669 2744 and we will be happy to help!
They say that there are two true guarantees in life: death and taxes, and the FIRPTA regulations are no exception. In fact, they are basically exhibit A for proving the point of that idiom. Why? Because Uncle Sam says that any income received within the US has to be paid, even if you aren’t a US citizen and even if you’ve never set foot in the United States. If you own a property in America and you sell it, you, as a foreign citizen are still responsible to pay the US government income tax on that sale.
That is the beauty of US tax law! However, if a foreign national does not end up paying the income tax on the property they sold, then the buyer, typically a US citizen, is responsible for paying Uncle Sam, and that is where FIRPTA kicks in. The good news is that there are a few exceptions. Here they are:
If the property sells for less than $300,000:
If the property in question is selling for less than $300k and the buyer intends to reside in it for at least 51% of the time during the next two years, then the property is exempt from the FIRPTA withholding (usually 10%) if and only if the buyer signs an intent to reside affidavit at the closing.
If the property is selling for over $300,000 but less than $1,000,000:
If the property is between $300k and a million dollars, then the buyer can again file an intent to reside affidavit at the time of closing which then reduces the withholding amount to 10%. If in any scenario the buyer does not intend to reside or doesn’t submit the affidavit or the property is selling for over $1,000,000, then the withholding amount will be 15% of the sold amount.
The seller can file for what is known as a “Withholding Certificate” with the IRS. This document makes is so that the seller can have a reduced withholding amount taken out of the property transaction. Please see a CPA and/or tax attorney about this if you have any questions in order to get it filed and completed properly. This can save you a lot of time and money if done correctly.
Buyers: Be diligent and ask your real estate agent if the property in question is owned by a foreign national so that you can enter the transaction knowing all of the rules that apply. For more information check out the IRS’s website on FIRPTA here and here.
Sellers: Communicate with your agent and with potential buyers so they are informed of the liabilities and additional rules that apply with this transaction.
All in all, you don’t need to be an expert in FIRPTA rules to have a successful real estate transaction, but it helps to know the basics. Please contact us today if you have any additional questions or if you would like to buy or sell a property in Colorado in the near future. We’ll take good care of you. Phone: 303 669 2744.