Sales and Rentals by Non-Residents

Navigating the intricacies of sales and rentals of real estate owned by non-residents presents some significant differences from the sale and rental by permanent residents. The primary regulation which comes into play is the Foreign Investment in Real Property Tax Act, which is commonly abbreviated as “FIRPTA” (pronounced Firp-Ta). The IRS considers residents as being U.S. citizens and those other non-citizens who satisfy the IRS’s substantial presence test.

FIRPTA REQUIREMENTS AND EXCEPTIONS

Unless an exception applies, FIRPTA will require that fifteen percent of the sales price of the real estate be withheld from a non-resident seller upon the sale (or other disposition) of the property. There are two main exceptions which can be utilized by non-residents. The first exception allows for the withholding percentage to be reduced to zero if the sales price is below $300,000.00 and the buyer is willing to sign an affidavit stating that either the buyer or a member of the buyer’s family is going to reside in the property for at least half of the time the property is occupied for the first two years after the sale. The second exception allows the withholding amount to be reduced to ten percent if the sales price of the real estate exceeds $300,000.00 and the buyer is willing to sign such an affidavit.

IRS REGULATIONS

Since the non-payment of required withholding can create a lien on the real property, the IRS regulations make a buyer responsible for ensuring that the seller’s sale proceeds are properly withheld. A buyer may accomplish the withholding by either placing the withheld funds with an escrow agent selected by the buyer, who will hold the funds until the IRS issues a withholding certificate specifying the amount of the seller’s tax liability, or sending the withheld funds directly to the IRS upon the closing of the sale. If an escrow agent holds the funds, then they will send the IRS the withheld funds up to the amount of the tax liability shown on the withholding certificate and return any excess funds to the seller.

FIRPTA REGULATIONS: RENTAL PROPERTIES

In addition to sales of real estate, FIRPTA also applies to rental income from real estate. When a nonresident leases their U.S. property, they are required to withhold thirty percent of the rental income received and remit it to the IRS. The FIRPTA regulations applicable to rental income require anyone who is the control, receipt, or custody of the rental income to make the required withholding. Such persons are primarily liable for the tax which should have been withheld in addition to interest, penalties and potential criminal sanctions for failing to withhold and remit the taxes. As such, it is critical for Florida Realtors® who receive and collect rents for non-residents, to ensure that the withholding is accomplished in a timely manner.

This article is meant for educational purposes only. It is not intended to serve as legal advice and should not be used as a substitute for consultation with an attorney.