- FIRPTA: IRS rules that require the seller of real property (via the title company) to withhold 15% of the gross sales amount and remit it to the IRS within 20 days of closing
- LLC: Limited Liability Company based in any of the 50 States of U.S.A.
- Non-Resident Aliens (NRA): an individual with income related to a US trade or business that is not a “US Person” and must file a 1040NR Tax return – generally subject to income tax witholding
- Foreign Owners: if any of the owners, members and/or partners of the LLC are considered an NRA
If you are an individual NRA or foreign owner/member of an LLC; you will most likely get a withholding of 15% of the sales price of the property (proportionate to your ownership interest). This withholding will then need to be considered as a final calculation of the income tax liability (or refund) on that individual’s tax return based on the single/individual graduated rates. For most NRA’s this withholding will be partially refunded; as generally the withholding would be superior to the capital gain on the property; but every case is different.
The big issue with this is twofold:
- Most NRA’s do not have a social security number or an ITIN- so we must request one via the form W-7 and might require special documentation send to the IRS (such as the original passport or certified copy from the issuer) which posts some logistical issues or inconveniences to the taxpayer. Alternatively, they may come in person to an IRS Office or an Acceptance Agent Office.
- They need to wait until February/March of the following year to get their refund (best case scenario)
What if the Real Estate is owned by an LLC (or a Corporation)?
If the property is owned by an LLC owned 100% by a single owner/member; then the FIRPTA rules would apply as normal. But, if the LLC is taxed as a partnership (which is the default treatment of an LLC with more than one owner) then the FIRPTA rules will not apply and no withholding is necessary. If the LLC closed to be taxed as a corporation, the FIRPTA rules would not apply, even if is 100% owned by 1 NRA.
What about the $300,000 Exception Rule?
There are multiple conditions that would apply, but one of the most typical is if the buyer is a US person that will be living there (or a member of the family) at least 50% of the days in the consequent 2 years and the sales price is less than $300,000. IRS page: https://www.irs.gov/individuals/international-taxpayers/exceptions-from-firpta-withholding
It is for that reason, that we recommend NRA’s to create LLC’s before purchasing Real Estate under their own personal name
some resources:
- https://www.irs.gov/individuals/international-taxpayers/helpful-hints-for-partnerships-with-foreign-partners
- https://www.kbgrp.com/articles/international-tax/limited-liability-companies-and-firpta.html
