If you are a foreign owner preparing to sell real estate in Florida, you may have heard about the 15% FIRPTA withholding requirement.
What you may not have heard is this:
The full 15% withholding may not always be necessary.
And just as importantly:
15% withholding does not mean you necessarily owe 15% of the sales price in tax.
These are two important distinctions for foreign property owners to understand before selling U.S. real estate.
Under certain circumstances, when the amount otherwise required to be withheld would exceed the seller's maximum tax liability, the seller may apply to the IRS requesting a reduced amount.
This is not an automatic reduction, and it requires advance planning. But it is an option worth investigating before closing.
First, What Is FIRPTA?
FIRPTA stands for the "Foreign Investment in Real Property Tax Act".
When a foreign person sells real estate they own in the United States, FIRPTA generally requires the buyer to withhold a portion of the amount realized from the sale.
The general withholding rate is 15%.
In a typical real estate transaction, the amount realized is generally based on the contract price, although the IRS definition can also include other property transferred and certain liabilities.
The buyer is generally considered the withholding agent and is responsible for making sure the applicable FIRPTA withholding requirements are followed. There are exceptions and special rules, not every transaction is treated exactly the same way.
But for many foreign sellers, the number that immediately gets their attention is the 15%.
For foreign sellers, 15% FIRPTA withholding does not necessarily mean 15% tax liability, and the withholding may be reduced in qualifying circumstances.
Here Is the Part Many Foreign Sellers May Not Know
The standard 15% FIRPTA withholding may be more than the seller's maximum tax liability from the sale.
When that happens, the IRS provides a process through which a reduced amount may be requested.
A foreign seller may apply for an IRS withholding certificate based on a calculation of the seller's maximum tax liability. For qualifying applications, this is generally done using Form 8288 B, "Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests".
If the application is approved, the IRS withholding certificate can authorize a lower withholding amount. In appropriate circumstances, the withholding may potentially be eliminated altogether.
The application itself is relatively straightforward, but the important work is establishing and documenting the seller's maximum tax liability. The seller or closing agent cannot simply decide to withhold less than the amount otherwise required based on their own estimate. The seller must formally apply, provide information supporting the requested reduction, and receive the IRS determination. Not every foreign seller applying qualifies for a reduction.
That makes the withholding certificate process an important option for foreign sellers to investigate well before closing.
Why Could the Withholding Be Reduced?
The answer becomes clearer once we distinguish between withholding and tax liability.
FIRPTA withholding is a tax collection mechanism. It essentially collects a deposit toward a potential U.S. tax liability, before the foreign seller's final tax liability from the transaction is determined through the applicable tax filing at a future point.
The standard withholding calculation generally starts with the amount realized from the sale, and is disconnected from the seller's profit in the transaction.
The seller's actual tax situation is calculated differently.
For example, a seller may have an adjusted cost basis in the property resulting from the original purchase and subsequent qualifying improvements. Depreciation and other tax considerations may also be relevant. The property's current sales price could even be lower than what the seller originally paid for it.
The IRS withholding certificate process recognizes that the standard amount otherwise required to be withheld can exceed the seller's maximum tax liability.
That is why this distinction matters:
15% withholding ≠ 15% tax liability.
What If the Florida Property Was Your Second Home?
This can be particularly worth investigating for foreign owners who purchased a Florida property as a second home or vacation residence rather than primarily as an investment property.
The fact that a property was a second home does not by itself exempt the seller from FIRPTA or automatically qualify the seller for reduced withholding. However, the property's ownership and tax history can be very different from that of a rental or investment property.
A longtime owner may have a substantial adjusted basis from the original purchase and qualifying improvements. A property that was not used as a rental may also have a different depreciation history. Depending on the seller's individual circumstances, these factors may result in a maximum tax liability that is considerably lower than the standard FIRPTA withholding calculation.
For foreign owners who purchased a Florida condo, waterfront home or other residence for their own seasonal or vacation use, this is one more reason not to simply assume that the standard withholding amount is unavoidable. A qualified U.S. tax professional can review the property's history and determine whether requesting a reduced withholding certificate may be appropriate.
Consider a $500,000 Florida Property
Suppose a foreign owner is selling a Florida property for $500,000.
Using the general 15% FIRPTA calculation:
Sales price: $500,000
General 15% withholding calculation: $75,000
Seeing $75,000 potentially withheld from the proceeds can understandably be concerning.
But the $75,000 withholding calculation does not automatically mean the seller owes $75,000 in U.S. income tax.
The seller may have purchased the property for a substantial amount. There may have been qualifying capital improvements. The seller may have a much smaller taxable gain than the property's $500,000 sales price.
The actual calculation can involve adjusted basis, depreciation, recapture, applicable tax rates and other factors specific to the seller. It quickly becomes evident why a qualified U.S. tax professional should be consulted.
If the seller's maximum tax liability is lower than the amount otherwise required to be withheld, the seller may want to investigate applying for an IRS withholding certificate.
The purpose of this example is simple:
A $75,000 FIRPTA withholding calculation does not automatically mean a $75,000 tax liability, and the full $75,000 may not necessarily have to be remitted to the IRS if a reduced withholding certificate is obtained.
How Is Reduced FIRPTA Withholding Requested?
Form 8288 B is used for certain applications for a withholding certificate involving dispositions of U.S. real property interests by foreign persons.
When an application is based on the seller's maximum tax liability being lower than the amount otherwise required to be withheld, the seller must provide information supporting that calculation.
Depending on the circumstances, the calculation can involve the amount realized, adjusted basis, depreciation and recapture information, applicable tax rates and tentative tax.
The current IRS instructions identify documentation such as closing statements, invoices for improvements and depreciation schedules as examples of information that may be used to support adjusted basis.
There is a practical benefit to doing this work before the sale. A foreign seller will generally need to address the U.S. tax consequences of the sale through the applicable tax filing process. Much of the financial information needed to evaluate a reduced withholding request, such as purchase information, improvements, adjusted basis and depreciation history, will also be relevant when preparing that tax filing. Investigating reduced withholding does not necessarily create extra bookkeeping, it merely requires organizing the property's financial history before the sale rather than waiting until the following tax filing season.
For someone who has owned a Florida property for many years, assembling that information can take time. This is one reason the reduced withholding option should be investigated early in the selling process.
What Happens to the Money If the Application Is Still Pending at Closing?
This is particularly important from a cash flow perspective.
If a qualifying withholding certificate application was submitted to the IRS on or before the date of transfer but has not yet been decided when the property closes, the applicable standard 15% FIRPTA amount still must be withheld from the seller.
However, IRS guidance provides that the withheld amount generally does not have to be immediately reported and paid to the IRS while the application is pending.
Once the IRS makes its determination, the amount withheld, or the lower amount authorized by the IRS, generally must be reported and paid to the IRS within 20 days after the IRS mails its decision.
For example, if $75,000 would otherwise be withheld but the IRS subsequently authorizes a lower withholding amount, the IRS determined amount would be remitted under this procedure. The handling and release of any funds under this scenario need to be coordinated with the title company, closing agent or attorney handling the transaction.
Do Not Wait Until Closing to Investigate This
If you are a foreign owner considering selling Florida real estate, the time to start asking about FIRPTA is early in the process.
The IRS states that it will generally act on a withholding certificate application within 90 days after receiving a complete application, including the information necessary to make its determination. Because the application requires supporting information and may still be pending when the property closes, advance planning matters.
The practical takeaway is straightforward:
Do not discover the reduced withholding option at the closing table.
Who Should Help With This?
FIRPTA transactions often involve coordination among the seller, buyer, Realtor, closing professional and a qualified U.S. tax professional.
As a Florida Realtor, my role is to recognize when FIRPTA may be relevant, raise the issue early, help keep the real estate transaction organized, and encourage the seller to involve the appropriate professionals before deadlines become a problem.
A qualified U.S. tax professional can evaluate the seller's particular circumstances, calculate the potential maximum tax liability and advise whether applying for a withholding certificate may be appropriate.
The closing professional can address the withholding and procedural requirements associated with the transaction.
Starting these conversations early gives sellers the opportunity to take educated steps towards reducing their witholding if applicable.
The Two Things I Want Foreign Sellers to Remember
If you take only two things away from this article, make them these:
1. The standard 15% FIRPTA withholding may be reduced.
When the amount otherwise required to be withheld exceeds the seller's maximum tax liability, a foreign seller may be able to request an IRS withholding certificate authorizing a reduced amount. In appropriate circumstances, withholding may potentially be eliminated.
2. A 15% withholding calculation does not mean a 15% tax liability.
Withholding and the seller's ultimate U.S. income tax liability are different concepts. The standard withholding calculation is not, by itself, a determination of how much tax the seller ultimately owes.
For a foreign owner preparing to sell Florida property, these are important issues to investigate before closing.
If you own property in the Tampa Bay area and are considering selling, I can help you prepare for the real estate side of the transaction, identify issues that should be addressed early, and coordinate with the appropriate closing and tax professionals throughout the process. Never hesitate to reach out if you would like to discuss this some more!
Sie möchten mehr über FIRPTA auf Deutsch erfahren? In meinem deutschsprachigen Artikel erkläre ich die wichtigsten Regelungen und gebe praktische Tipps für den Immobilienverkauf in Florida.
Sources
Internal Revenue Service, FIRPTA Withholding
Internal Revenue Service, Withholding Certificates
Internal Revenue Service, Form 8288 B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests
Internal Revenue Service, Instructions for Form 8288
Internal Revenue Service, Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
Educational Disclaimer
This article is provided for general educational and informational purposes only and is not intended as tax, accounting or legal advice. FIRPTA requirements and U.S. tax consequences depend on the facts of each transaction. Foreign property owners should consult a qualified U.S. tax professional or attorney regarding their individual circumstances.