What do International Sellers have to keep in mind when selling their property in Florida?
The magic word is “FIRPTA”!
International sellers of real estate need to be aware that recent federal tax legislation increased the FIRPTA overall withholding rate, under certain conditions, from 10% to 15% effective for closings on or after February 16, 2016.
What is FIRPTA?
When a foreign person sells his U.S. real estate, he or she is subject to the FIRPTA requirements. So, what are exactly the requirements of the Foreign Investment in Real Property Act? The closing agent will withhold fifteen percent of the gross sales price received at the closing and he must remit the money to the Internal Revenue Service no later than 20 days after closing. Is Uncle Sam greedy? No, who thinks so?
The fifteen percent withholding does not necessarily represent the amount owed on the sale. It is merely a “deposit”. The IRS applies that against the actual tax owed. If the tax of the transaction is less than the deposit, the IRS difference will refund the money to the seller. If the seller owes more than the withholding, the seller must, unfortunately, pay the difference to the Internal Revenue Service later on. If he doesn’t do that, the IRS might cause a big surprise.
What is taxable?
It is the capital gain. However, the seller is permitted to deduct all expenses. Therefore, it is very important that the Foreign homeowner is keeping all his receipts. Whatever he paid for the home is deductible (tax, insurance, repairs, maintenance, management fees etc.). In many cases, there is no tax to pay, however, if he is a lucky dog and doubled the sales price within 2 years – he will most likely pay Uncle Sam a nice portion out of the money he realizes.
This is the new rule (after 2/16/2016):
- If the amount realized (generally the sales price) is $300,000 or less, AND the property will be used by the Transferee as a residence (as provided for in the current regulations), no sums need be withheld or remitted.
- If the amount realized exceeds $300,000 but does not exceed $1,000,000, AND the Transferee uses the property as the primary residence then the withholding rate is 10% on the full amount realized.
- If the amount realized exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the Transferee.
An Affidavit is necessary
He also needs to sign an affidavit, under penalties of perjury, that he or she meets the requirement of the conditions.
Closing agents should adjust their procedures and forms to reflect this change.
This article is for information purpose only and does not represent any legal advice. Please contact an attorney or tax adviser of your choice to get proper legal information.