FIRPTA Withholding Tax Trap for Expatriate NRAs Selling US Real Property
FIRPTA Tax Trap for Expatriate Nonresident Aliens Selling US Real Property: When it comes to expatriation, there are various tax traps that an expatriate (especially a covered expatriate) has to be aware of at the time of expatriation. For example, if a person is already considered a long-term resident and then files a Form 8833 to be treated as a foreign resident — that can be considered the expatriating act. Another important tax trap — or specifically, a withholding trap — is when a nonresident sells US property. With expatriation, this issue comes into focus when a former US person — now expatriate — has US Real Property and waits to sell the property until after they expatriate. The reason this is an issue is because at the time of sale the former US Person is now considered a nonresident alien (unless they have become a US Person again) and would be subject to FIRPTA — which requires a 15% withholding on the gross sale price, subject to a Form 8288-B withholding exemption certificate. Let’s review the FIRPTA withholding trap for nonresident aliens expatriates.
FIRPTA Definition (Foreign Investment in Real Property Tax Act)
This introduction of FIRPTA was designed to curtail the growing problem of nonresident aliens who own US property but do not pay US income tax when they sell the property. While some capital gains tax incurred by nonresident aliens is exempt from US Tax — US-based real estate and other real property is excluded from this exemption. Stated another way, a nonresident alien must pay US tax on the sale of US real property.
But, how on earth is the Internal Revenue Service going to track down and enforce this tax rule for foreign nationals who reside outside of United States — and have no other connection to the US? The way to accomplish this goal and level the playing field, was to introduce FIRPTA and require a FIRPTA Withholding Tax.
What is FIRPTA Withholding?
In accordance with FIRPTA, 15% of the sale price is withheld at the time of sale the property. US Agents, Title Officers, Escrow, Agents etc. are very strict about requiring sellers to confirm whether or not they are foreign — because if they do not comply with FIRPTA then they can be left holding the bag.
No Additional Tax Due to Withholding
It is important to note that there is no additional tax levied against the nonresident alien seller of the US real property; FIRPTA is more of a very inconvenient nuisance. In other words, the FIRPTA Withholding Tax is merely a withholding of money to ensure the proper (not additional) taxes are paid. While the purpose of the rule is simply to ensure that the foreign national pays tax on the sale, it can be very draining for the foreign national who resides outside of the US. From the IRS’s perspective, if the US withholds 15% of the sale price, you can best believe the NRA seller will file a tax return — which contradicts the goal of exiting the US tax system for good.
Can You Avoid Withholding?
You may possibly be able to avoid FIRPTA Withholding Tax
By submitting a timely Internal Revenue Service Form 8288-B request, the Nonresident Alien can make a request to be exempt from withholding — if they meet the requirements/exceptions for doing so. The problem is that the real estate market can go hot and cold relatively quickly — and FIRPTA can cause a significant delay. It can take several months to receive withholding approval — and this can end up torpedoing the deal depending on the specific buyer. And, at least in California where the buyer holds all the cards, timing can be an especially serious issue when it comes to closing. Therefore, if you are considering expatriation and plan on selling a US Real Property Interest(s) after expatriation — you will want to consider issues involving the FIRPTA Withholding Tax first.
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