Are you a nonresident who is planning to sell your US personal home, vacation home, or rental property? If so, you need to understand FIRPTA withholding.
FIRPTA stands for the Foreign Investment in Real Property Tax Act. It is the US law that requires tax withholding on the sale of US real property by foreign sellers. If you are like many nonresidents, the first time you may have heard about FIRPTA was when you put your house on the market—or when you went under contract to sell. FIRPTA can be a big tax surprise in the form of a 10%-15% withholding on the sales price of a property.
For example, on the sale of a $1 million home, the IRS can automatically withhold $150,000 at the time of closing. And this withholding can be held for months, even if no capital gains tax is owed. This is done to ensure that the IRS receives the taxes that may be due.
The real estate (or withholding) agent will send the withholding to the IRS—even if you expect a loss on the sale. Yes, you will get the withholding back, assuming you don’t have a big gain on the sale. But to get the cash, you have to wait until next year, file a US tax return, and request a refund. Not ideal, especially if you had other plans for the money.
So, do you need to just wait for a refund? Not necessarily. There are three options, each with pros and cons. We can help you determine which options you qualify for and walk you through the steps. We can also advise you on the common pitfalls since there can be delays by the IRS or mistakes made by real estate agents or withholding agents