Section 1445 of the Internal Revenue Code 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.
Does FIRPTA Apply to Vacant Land?
FIRPTA applies to all property, including vacant land, purchased from a foreign seller. The FIRPTA withholding tax required on the sale of vacant land is 15%, and there is no eligibility for reductions or exemptions from the rate, as there is for residences.
How to Calculate the FIRPTA Withholding Rate
There are four scenarios that determine which withholding rate or exemption applies. The calculation begins with the intention of the buyer.
- The buyer must be an individual, and the buyer, or a member of the buyer’s family, plans to make personal use of the property as a residence.
- They must plan to reside at the property at least 50% of the time for each of the first two years following the date of purchase. In this case, the buyer(s) should provide you with a residential use affidavit stating that those are their intentions.
If the buyer is not an individual, or doesn’t plan to use the property as a residence, the withholding rate is automatically 15%.
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1 Exemption from FIRPTA Requirements: Sale Price Under $300,000
An exemption to the withholding requirement applies If the buyer will sign an affidavit intending to make personal use of the property, and the purchase price is under $300,000. In the absence of the signed affidavit, the FIRPTA withholding will be 15% and the appropriate FIRPTA compliance forms (8288 and 8288-A) must be completed.
2 Withholding Rate of 10%: Sale Price $300,000 to $1,000,000
If the purchase price is between $300,000 and $1,000,000, and the buyer signs the affidavit intending to make personal use of the property, 10% FIRPTA withholding will apply. In the absence of the affidavit, the FIRPTA withholding will be 15% and the appropriate FIRPTA compliance forms (8288 and 8288-A) must be completed.
3 Withholding Rate of 15%: Sale Price Over $1,000,000
If the purchase price is over $1,000,000, the FIRPTA withholding is automatically 15% and the appropriate FIRPTA compliance forms (8288 and 8288-A) must be completed.
4Withholding Certificate: Exemption or Reduction of Withholding Based on Total Taxes Owing
If your U.S. taxes owing will be significantly less than the 15% withholding, or if you are selling your property at a loss, you can apply for a withholding certificate by completing Form 8288-B (Application for Withholding Certificate), which must be submitted to the IRS by the closing date.
When the application is for a reduction of the withholding amount, the application will include a calculation of the expected capital gains tax to demonstrate to the IRS that the taxes owing will be less than the amount of the withholding. The IRS will adjudicate the application, which will take a minimum of 90 days and likely more.
Does All This FIRPTA Stuff Seem Too Confusing?
We get it. Many of our past clients have come to us totally confused and stressed out. But once they know they’re in good hands, they’re calm and relaxed.
We’ve helped many Canadian clients through this process, and we can do the same for you, virtually or in person. From the time you list your property for sale, through to the filing of the various compliance forms and tax returns, we’ll help you every step of the way so you can breathe easy and spend your time on more enjoyable things.
Contact us today to get started, and we’ll get back to you within one business day.