September 16, 2019
I received an email this morning asking “Hi Marc, I am selling my home , I am not a US citizen, does FIRPTA still apply to me since I lived in my Houston, Texas property as a primary residence for three years before I left the United States last year?”
A widely held misconception is that if there is no tax due on a property sale, then it is exempt from FIRPTA – this is WRONG. Remember, FIRTPA is NOT a tax, it is a deposit to cover potential tax or tax debts that might be owed by a Foreign Seller. The fact that there is no tax due on a sale (even if it is a los on sale) does not exempt the sale from FIRPTA withholding.
The Seller in this case purchased the home in late 2015 for $355,000. The contract sale price is 400,000 and the Buyer’s daughter intends to live in the property as her personal residence.
The answer is YES, FIRPTA withholding does apply even if there is no tax due on the sale of the property.
Regarding tax on the sale, well yes there is at first glance a potential $45,000 gain on the sale, but remember closing costs which average about 8% will be factored in, so the actual gain on the sale is expected to be about $13,000. Since the Seller lived in the property for two years as a primary residence, the section 121 exclusion of $250,000 on gain per spouse would eliminate any tax. Even if section 121 did not apply, there would likely be no tax due on the sale because a $13,000 long term capital gain with no other US source income in 2019 would result in zero tax.
So with no tax due, why is there a FIRPTA withholding requirement?
FIRPTA is a law where the general rule mandates the Buyer MUST withhold 15% of the contract sale price unless there is some exception to the general rule applies. If Buyer is willing to sign an affidavit certifying that Buyer intends to occupy the property as a primary residence, then the FIRPTA withholding can be reduced to 10%. So in this case, the Buyer must withhold $40,000 from the Seller and send it to the US Treasury. The $40,000 is Seller’s money and Seller can either wait until next year to file a tax return and claim back their refund of $40,000 or Seller can ask IRS for an early refund and maybe get the money back in about 90 days.
The bottom line is this Every sale is a FIRPTA sale until Buyer has proof Seller is not a Foreign Seller. If Seller is Foreign, then 15% FIRPTA withholding applies unless there is an exception. If Buyer fails to comply with the rules, the Buyer is on the hook for the 15% plus penalties (Both Realtors and the Title Company are also on the hook for penalties).
If you have questions or need more information, give Tax Solutions – Trusted Globally www.taxss.com a call at (281) 578-1040 or click on the contact us link https://www.global-taxsolutions.com/contact-us/