What is "FIRPTA" Anyway?
FIRPTA (The Foreign Investment in Real Property Tax Act of 1980) is a section of the U.S. Income Tax Code which specifically deals with the sale of U.S. real property by a "nonresident" of the U.S. When a nonresident sells property in the U.S., they are required to report the sale by filing a U.S. tax return for the year of the sale, and pay any income tax that may be due on the capital gains of the sale, in much the same manner that any U.S. resident would.
Because many of these sales were not being reported, and the tax was not being paid, Congress, in 1984, added a requirement that 10% of the gross sale amount must be withheld at the time you sell the property, and paid in to the IRS. Canada has a similar requirement for nonresidents of Canada. In 2016 this withholding rate increases to 15% for most sales.
This means that when you sell your property in the U.S., you will be required to file form 1040NR, U.S. Nonresident Alien Income Tax Return, for the year in which you sell the property. If you are married and the property is in both of your names, you will each have to file a return. You will have to pay income tax on any capital gain you have on the property above the exemption amount. Currently you get an automatic exemption of the first $40,000 of long term gain and you will pay no tax on that amount. Any Gain above that amount will be taxed at a 20% rate.
AM I A NONRESIDENT
You are considered a to be a nonresident unless you meet either the "green card test" or the "substantial presence test". Green card test - You are a resident for tax purposes if you were a lawful permanent resident of the United States during the year and hold a valid "Green Card".
Substantial presence test - You are considered a U.S. resident if you meet the "substantial presence test" for the year of the sale. You must be present in the U.S. for at least 31 days during the year of the sale, and 183 days counting the number of days in the year of the sale and 1/3 of the number of days present the previous year, and 1/6 of the number of days present the year before that. (a note from Roy for further understanding - If I'm a Canadian and I spend the winters in the US, I add up the number of days I was in the US during 2015, plus, 1/3 of the days I was in the US in 2014 plus 1/6 of the days I was in the US in 2013. If the total of this is over 183, then under tax the rules I can be considered a US Resident. This means I have to file a US Income Tax Return and report my worldwide income, etc. There is an exception to this under what is called the closer connection rules, and that will allow someone to spend that much time in the US and still not have to file a US Income Tax return. For our purposes in regards to the FIRPTA rules, if someone is a resident of the US and files a US Income tax return, then the withholding won't apply to them. This happens very infrequently. Usually they are in the US on a VISA.)
If you are a permanent resident, then you must file a U.S. Income tax return, and report all of your income from all sources, including those outside the United States.
CAPITAL GAINS The actual tax you owe on the sale of your property will be based on the amount of capital gain you have on the sale of the property. Under U.S. rules, your basis in the property is your original purchase price, plus any improvements made to the property, plus any assessments paid for installation of water or sewer services. Property taxes, interest, association dues and monthly fees for utilities, etc., are not included in the basis of the property.
The net sales proceeds are used to determine if you have a gain. This is calculated by taking the gross sales price, less the closing costs, such as the sales commission, the excise taxes, and the other charges from the escrow company. Example: You purchased the property for $100,000. You are now selling for $150,000. The sales commission is $9,000. The other closing costs are $3,000. You have a capital gain of $38,000, ($150,000 – 100,000 - 9,000 - 3,000). If you have a capital gain, some amount of withholding will be required. You may file for a withholding certificate, see below, to get the amount withheld reduced, but you will still have to file a tax return to show your true tax owed and to get a refund of as much of the tax withheld as possible. If you have a loss on the sale, you may apply for a withholding certificate and get the amount to be withheld reduced to $0. This does not relieve you from the responsibility to file a tax return, however, this will keep the IRS from holding your money until the end of the year.
THE WITHHOLDING CERTIFICATE
The "withholding certificate" is a way to get an early refund of the 10% withholding. You may apply as soon as you have signed the selling agreement. You may submit the application either before or after the sale closes. Filing before closing is much more advantageous. It may take from 3 to 6 months to get it approved, depending on the complexity of the sale and dependent on whether you already have a US Tax ID number. Filing for a withholding certificate is a way to get an early refund only. You are still required to file a US Tax Return at the end of the year.
HOW DO I FILE FOR A WITHHOLDING CERTIFICATE OR TAX RETURN
The following items are needed to file for a withholding certificate, and also to file a tax return and to calculate your gain or loss on the sale.
1) A copy of your original purchase documents, showing the purchase price.
2) A copy of the selling agreement, (earnest money agreement).
3) If improvements were made to the property, a detailed list of the improvements showing the cost of each. Also, copies of the purchase slips or other documentation supporting the amounts shown.
4) A copy of the closing statement from the sale, or a statement of the estimated closing costs. This may be prepared by the real estate agent or the escrow company.
This information is being provided to you to assist you in determining your responsibilities in regards to the sale of your real property located in the United States. This material is intended for informational purposes only, and should not be considered a complete discussion of the tax law relating to these matters. It is distributed with the understanding that Roy A. Lentz, is not rendering legal, accounting, or other professional service and assumes no liability whatsoever in connection with its use. If I may be of assistance in helping you with your filing requirements for a withholding certificate or a U.S. tax return, please call for an appointment. 360-734-2172. www.lentzandassociates.com
Because many of these sales were not being reported, and the tax was not being paid, Congress, in 1984, added a requirement that 10% of the gross sale amount must be withheld at the time you sell the property, and paid in to the IRS. Canada has a similar requirement for nonresidents of Canada. In 2016 this withholding rate increases to 15% for most sales.
This means that when you sell your property in the U.S., you will be required to file form 1040NR, U.S. Nonresident Alien Income Tax Return, for the year in which you sell the property. If you are married and the property is in both of your names, you will each have to file a return. You will have to pay income tax on any capital gain you have on the property above the exemption amount. Currently you get an automatic exemption of the first $40,000 of long term gain and you will pay no tax on that amount. Any Gain above that amount will be taxed at a 20% rate.
AM I A NONRESIDENT
You are considered a to be a nonresident unless you meet either the "green card test" or the "substantial presence test". Green card test - You are a resident for tax purposes if you were a lawful permanent resident of the United States during the year and hold a valid "Green Card".
Substantial presence test - You are considered a U.S. resident if you meet the "substantial presence test" for the year of the sale. You must be present in the U.S. for at least 31 days during the year of the sale, and 183 days counting the number of days in the year of the sale and 1/3 of the number of days present the previous year, and 1/6 of the number of days present the year before that. (a note from Roy for further understanding - If I'm a Canadian and I spend the winters in the US, I add up the number of days I was in the US during 2015, plus, 1/3 of the days I was in the US in 2014 plus 1/6 of the days I was in the US in 2013. If the total of this is over 183, then under tax the rules I can be considered a US Resident. This means I have to file a US Income Tax Return and report my worldwide income, etc. There is an exception to this under what is called the closer connection rules, and that will allow someone to spend that much time in the US and still not have to file a US Income Tax return. For our purposes in regards to the FIRPTA rules, if someone is a resident of the US and files a US Income tax return, then the withholding won't apply to them. This happens very infrequently. Usually they are in the US on a VISA.)
If you are a permanent resident, then you must file a U.S. Income tax return, and report all of your income from all sources, including those outside the United States.
CAPITAL GAINS The actual tax you owe on the sale of your property will be based on the amount of capital gain you have on the sale of the property. Under U.S. rules, your basis in the property is your original purchase price, plus any improvements made to the property, plus any assessments paid for installation of water or sewer services. Property taxes, interest, association dues and monthly fees for utilities, etc., are not included in the basis of the property.
The net sales proceeds are used to determine if you have a gain. This is calculated by taking the gross sales price, less the closing costs, such as the sales commission, the excise taxes, and the other charges from the escrow company. Example: You purchased the property for $100,000. You are now selling for $150,000. The sales commission is $9,000. The other closing costs are $3,000. You have a capital gain of $38,000, ($150,000 – 100,000 - 9,000 - 3,000). If you have a capital gain, some amount of withholding will be required. You may file for a withholding certificate, see below, to get the amount withheld reduced, but you will still have to file a tax return to show your true tax owed and to get a refund of as much of the tax withheld as possible. If you have a loss on the sale, you may apply for a withholding certificate and get the amount to be withheld reduced to $0. This does not relieve you from the responsibility to file a tax return, however, this will keep the IRS from holding your money until the end of the year.
THE WITHHOLDING CERTIFICATE
The "withholding certificate" is a way to get an early refund of the 10% withholding. You may apply as soon as you have signed the selling agreement. You may submit the application either before or after the sale closes. Filing before closing is much more advantageous. It may take from 3 to 6 months to get it approved, depending on the complexity of the sale and dependent on whether you already have a US Tax ID number. Filing for a withholding certificate is a way to get an early refund only. You are still required to file a US Tax Return at the end of the year.
HOW DO I FILE FOR A WITHHOLDING CERTIFICATE OR TAX RETURN
The following items are needed to file for a withholding certificate, and also to file a tax return and to calculate your gain or loss on the sale.
1) A copy of your original purchase documents, showing the purchase price.
2) A copy of the selling agreement, (earnest money agreement).
3) If improvements were made to the property, a detailed list of the improvements showing the cost of each. Also, copies of the purchase slips or other documentation supporting the amounts shown.
4) A copy of the closing statement from the sale, or a statement of the estimated closing costs. This may be prepared by the real estate agent or the escrow company.
This information is being provided to you to assist you in determining your responsibilities in regards to the sale of your real property located in the United States. This material is intended for informational purposes only, and should not be considered a complete discussion of the tax law relating to these matters. It is distributed with the understanding that Roy A. Lentz, is not rendering legal, accounting, or other professional service and assumes no liability whatsoever in connection with its use. If I may be of assistance in helping you with your filing requirements for a withholding certificate or a U.S. tax return, please call for an appointment. 360-734-2172. www.lentzandassociates.com
Used by permission from author Roy Lentz, CPA, Bellingham, WA
