What is FIRPTA in Real Estate?
The Foreign Investment in Real Property Tax Act (FIRPTA) is the U.S. federal law to tax foreign persons on dispositions of U.S. property (real estate), including vacation property. The term disposition includes, but is not limited to, a sale or exchange, liquidation, gift, transfer, or redemption.
The United States Internal Revenue Service (IRS) enforces FIRPTA to ensure the U.S. government is able to collect any tax obligations on foreign persons.
Without FIRPTA, the government would have no concrete means of collecting what they are potentially owed. As a solution, FIRPTA authorizes the IRS to tax foreign persons on dispositions of U.S. real property interests. The taxpayer must then file a U.S. federal and, if applicable, state tax return for the disposition of the property, and thus settle any FIRPTA obligations.
The IRS holds the buyer of the property fully liable for the full amount of the FIRPTA tax withholding on the disposition of the sale.
Take the complexity out of Foreign Investment. Contact us and discover how you can simplify the process and Breathe Easy.
Steps in the FIRPTA Process
1 Listing Your Property & Acceptance of Offer
Once you have decided to sell your U.S. property, and list the property with a realtor, you will then choose a title or escrow company experienced in working with FIRPTA and with foreign sellers. Generally, this company will work with both you and the buyer on the transaction. The buyer acts as a withholding agent for the IRS, and the title/escrow company assists the buyer with the IRS obligations.
After you accept an offer, and all conditions/contingencies have been removed, proceed to Step 2.
2Determining Your FIRPTA Withholding Rates & Exemptions
FIRPTA Section 1445 requires the buyer(s) of real estate from a foreign seller to act as withholding agents for the IRS, withhold tax on the proceeds of the sale, and remit the withholding to the IRS.
There are four scenarios that determine which withholding rates or exemptions apply to your situation.
3 Preparation and Filing of FIRPTA Compliance Forms
Once the sale is firm by way of the removal of the conditions/contingencies, the applicable FIRPTA compliance forms must be completed prior to the closing of the sale. As part of this process, in certain cases, it may be necessary for the buyer to sign an affidavit stating that he/she will be using the property as a personal residence as this may result in reduced or exempted withholding. Upon completion of this process, the sale will then close.
4 Understanding the FIRPTA Withholding Forms: 8288, 8288-A, 8288-B
Any sale of U.S. property by a Canadian resident must be reported to the IRS using Forms 8288, 8288-A, and 8288-B.
Forms 8288 and 8288-A are required in all cases, while Form 8288-B is only required if you are applying for an exemption or reduction from the statutory amount of withholding prescribed by the IRS.
5 ITIN Number
All Canadians require an ITIN number in order to file U.S. tax returns and properly apply any withholding amounts to your account.
If you have an existing ITIN (Individual Taxpayer Identification Number), the IRS will:
- Validate the FIRPTA withholding information and cheque sent by the title/escrow company.
- Apply/attach the withholding tax to your ITIN.
- Issue a final tax slip
(8288-A),which will have a locator number stamped across the top, and send it to you. This final slip is required to file your U.S tax returns.
If you do not have an existing ITIN:
- You should apply for the number immediately upon closing, since the ITIN application takes 12 weeks to process.
- The FIRPTA withholding tax (see withholding rates and exemptions) will sit in “limbo” status until your ITIN has been issued. It is your responsibility to notify the FIRPTA team within the IRS of your ITIN number so the withholding can be properly attached/applied to your ITIN.
- The IRS will then issue a final tax slip
(8288-A)with the locator number, which can be used to file your U.S. tax returns.
6 File All Required Tax Returns
You must file the following tax returns: (Note: Each person on title must file individually.)
- U.S. federal personal tax return—Form 1040 NR. U.S. tax returns should be completed prior to filing Canadian returns.
- Personal tax return in the state where your property is located, if applicable. Not all states have state income tax.
- Canadian personal tax return.
If you paid U.S. tax, you may be eligible to claim a foreign tax credit. The Canada Revenue Agency (CRA) will more than likely review your return and ask for proof of payment of tax to the IRS. Specific documentation must be sent to the CRA along with the IRS transcripts (which must be ordered), or your foreign tax credit claim will be denied.
Stressed Out About FIRPTA? We Can Help, Virtually or In Person
Managing the entire FIRPTA process on your own can eat up a lot of your time, and cause you some sleepless nights.
Relax. Our team has the experience to efficiently help you navigate the various stages of the sale of your U.S. property, and file the applicable FIRPTA compliance and/or withholding certificate forms. We work with your title or escrow company and support them with the appropriate documentation related to FIRPTA.
Once your property sale has closed, we can also help you obtain your Individual Taxpayer Identification Number (ITIN) as we are Certifying Acceptance Agents (CAA) for the IRS and are authorized to authenticate your identity and identity documents (i.e., passport) by the Internal Revenue Service.
Upon issuance of your ITIN, we will file your federal, and if applicable, state tax returns at the appropriate time for the disposition of your property. As this also needs to be reported on your Canadian tax return, we can assist with this filing.
FIRPTA Doesn’t Have To Be Complicated
Our FIRPTA team will handle your transaction from the time of sale through all applicable tax filings on both sides of the border, so you can breathe easy.
Contact us today to get started, and we’ll get back to you within one business day.