The Foreign Investment in Real Property Tax Act of 1980 is more commonly known as FIRPTA. It is a tax enacted on foreign sellers of real property. It is not a capital gains tax. The US does not tax gains for foreign nationals. A gain is considered income in their case. This law requires those buying property from foreign sellers to withhold 15% of the purchase of the property. Until 2017 it was only 10%. These funds are held until the seller files and pays their taxes. Buyers who do not collect the FIRPTA withholding are subject to penalties. The buyers escrow agent is actually the one that holds the funds.
There are a several ways for foreign nationals to avoid this withholding. Many of which apply to corporate ownership. You can see all of them at IRS.gov. I will show the two most common ways individuals can avoid the FIRPTA withholding. Some planning ahead is required if you are going to go with the second option.
1. If the sales price of the property is less than $300,000, the withholding is not required if the buyer intends on using the property as a residence or if the buyer or family member plans to at least spend 50% of the time that it is occupied by others for two years after closing. As an example. If you rent it out for 3 months you must plan to stay there for 1.5 months for each of the first two years of ownership. The buyer must agree to sign a FIRPTA addendum as part of the purchase and sales agreement. It is a common misconception the buyer must use it as their primary residence. That is not the case.
2. The seller may apply to the IRS for a withholding certificate. There are many different instances were a withholding certificate can be used, but mainly they are used if little or no gain is being realized. You can only apply for the certificate once the property is under contract, but before it closes. Be sure to apply as soon as you can after the contract is signed.
Here in South Florida, where many of the homes are purchased as vacation homes and used only part time, it can be difficult finding buyers that will agree to sign the FIRPTA addendum. Mostly because they don't understand the rules or their agent doesn't understand the rules enough to explain them correctly. Make sure your agent has experience with FIRPTA.
I have helped many Canadians and other foreign nationals sell their Florida homes. Even if you don't qualify for the available exemptions, your tax liability may be minimal. The funds can be held for as little as 90 days and some times a year depending on the time of year you sell. It is best to consult an accountant that specializes in foreign property holders. I can refer you to one if you contact me.
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