What Relocation Managers Need to Know About the Foreign Investment in Real Property Tax Act (FIRPTA)
On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”). Notable for the relocation industry, the PATH Act amended the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) to increase the FIRPTA withholding rate from 10 percent to 15 percent of the gross proceeds of the sale of a U.S. residence with respect to sales of homes taking place on and after February 16, 2016.
Although the PATH Act may well protect Americans from tax hikes, it will greatly increase the withholding amounts required when a foreign person sells a home to a relocation company, and it may result in negative equity in those situations. In those cases, the transferee may be required to fund the negative equity or request a certificate from the IRS authorizing withholding of a lesser amount or no withholding. As noted below, the certificate process can be long and complicated. The PATH Act may increase the financial burden for non-resident aliens when relocation includes the sale of a U.S. home, and serves as a good reminder to plan ahead in those situations.
The following FAQs walk through the basics of the FIRPTA process:
What is FIRPTA in the context of relocation home sale?
Currently, Internal Revenue Code Section 1445 (a) (“FIRPTA”) requires a relocation company buying a U.S. real property interest (a home) to deduct and pay over to the IRS 10% of the amount realized by a foreign person from that sale. The withholding must be made even if the foreign seller believes that he or she will not have any capital gains tax with respect to the sale of a home. A U.S. real property interest is broadly defined as "any interest, other than an interest solely as a creditor," and includes “a fee ownership, co-ownership, or leasehold interest...and a life estate, remainder, or reversionary interest.” The term also includes any direct or indirect right to share in the appreciation in value, or in the gross or net proceeds or profits generated by the real property.
Who Qualifies as a Foreign Person?
There are two tests to determine whether a citizen of a foreign country is a resident alien (not a foreign person) or non-resident alien (foreign person) for U.S. tax purposes:
- “Green card” test—an individual is a resident alien if he/she has been lawfully accorded the privilege of living permanently in the U.S. under the immigration laws. In order to rely on the Green card test, the Green card must be valid at the time the relocation company acquires the home from a transferee.
- “Substantial presence test”—an individual who has been lawfully present in the U.S. for at least 31 days during the current year, and a total of 183 days during the current and the two preceding calendar years (see below).
What is a FIRPTA Affidavit?
To avoid withholding when Cartus purchases a home from transferees, our title company will request a non-foreign affidavit. The IRS regulations state that no particular form of affidavit is needed, although a sample certification for an individual seller is set forth in the regulations. However, if a transferee has already left the U.S, severing residency, or was never a resident, this affidavit procedure cannot be used. Therefore, withholding would be required, absent receipt of a withholding certificate from the IRS.
What is a Withholding Certificate?
A withholding certificate can be requested from the IRS stating that either a reduced withholding, or no withholding, is required upon the sale of the home. Cartus honors those certificates if provided to Cartus before we acquire the home. The procedures for applying for a withholding certificate are set out in detail in IRS Publication 515, "Withholding of Tax on Nonresident Aliens and Foreign Corporations." The process for requesting the certificate can be complicated; it usually requires the aid of a tax professional; and it takes a minimum of 90 days. In Cartus’ 60 years of experience, we have rarely seen a transferring employee effectively utilize this process.
How does FIRPTA work with jointly held property?
For jointly held property, Cartus determines the amount to withhold in the following manner: (a) determine the amount realized from sellers based on their capital contribution (husband and wife are deemed to be 50% each); (b) withhold on the amount allocated to foreign sellers; (c) credit the amount withheld among the foreign sellers as they agree in writing, or if no agreement, evenly dividing among foreign sellers.
Cartus is required to complete Form 8288 and transmit the tax withheld to the IRS within 20 days after we acquire a house from a seller subject to FIRPTA.
What happens to the withholding paid by Cartus to the IRS?
When the transferee files the tax return for the year in which the home is sold, if no taxes are due, the funds will be repaid to the transferee. If taxes are due, the withholding will be applied to those taxes.
PLEASE NOTE: This document is for informational purposes only and should not be construed as tax or legal advice. If you believe that you may have FIRPTA issues, please discuss them with your attorney or tax advisor.