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Understanding How the FIRPTA Withholding Certificate Works

Florida real estate has long been an alluring asset to investors from around the world, especially during these uncertain economic times. Even the U.S. Internal Revenue Service (IRS) has observed a “phenomenal rise” in foreign investment in American real property in recent years, buoyed by low interest rates and a weak dollar. However, despite this window of opportunity, most investors will see a dent in their return on investment thanks to the complexities of U.S. tax law—unless they hire real estate attorneys that understand the FIRPTA process.

What is FIRPTA?

Enacted over 40 years ago, the Foreign Investment in Real Property Tax Act, or FIRPTA, requires the buyer of U.S. real property from a foreign national seller to withhold up to 15% of the gross proceeds that the seller receives from the sale. This obligation applies even if the seller is not receiving any proceeds from the sale (such as in a short sale scenario) and regardless of whether the foreign seller is a natural person or a legal person (such as a corporation or LLC).

How the 8288B “FIRPTA Withholding” Certificate Process Works

In transactions governed by FIRPTA, the buyer or their closing agent is responsible for withholding the necessary proceeds and then submitting them to the IRS. In most cases, the withheld funds are sent to the IRS within twenty days of closing. 

However, if a Form 8288 Application for a Withholding Certificate is submitted instead on or before the closing date, the funds will be held in escrow pending the processing of the 8288B Application. If everything is in order, the IRS will issue the 8288B Withholding Certificate to the buyer or their agent authorizing them to release all or a portion of the withheld funds back to the seller. The 8288B Withholding Certificate package is complex and involves documentation from both the original purchase of the property as well as from the sale of the property. It also includes a tax calculation to show the approximate amount of the tax liability (if any).

AN 8288B Withholding Certificate is ideal for situations where a foreign national seller is realizing little or no gain from the sale of the property (or where the withholding amount is much higher than actual tax liability). Sellers often do not want to send a large withholding amount to the IRS and have to wait for the following tax year to get their refund back. 8288B withholding certificates are also used in situations where a foreign national seller wants to take advantage of 1031 exchange.  

A foreign national seller who does not have a social security number must also apply for an Individual Taxpayer Identification Number (ITIN). The ITIN should be applied for on or before the time that the Withholding Certificate package is submitted.

If a Withholding Certificate application is not submitted to the IRS prior to the closing date, the FIRPTA withholding has to be sent to the IRS and the seller will ordinarily have to file a U.S. income tax return the following year to get any refund back. However, with a timely filed FIRPTA Withholding Certificate, the seller can get his or her funds back in approximately 3-4 months (though that time period may be longer depending on the IRS).

The Importance of Timing 

When it comes to anything tax-related, timing is of the essence: While you want to file the FIRPTA Withholding Certificate early enough to get your funds as soon as possible, the IRS does not allow it to be submitted until a valid real estate contract has been executed—only then can the certificate be fled on or before the closing date on the contract.

If the FIRPTA Withholding Certificate has not been sent to the IRS by the time the transaction closes, then the filing will be considered untimely, and the withholding agent must transfer the withheld proceeds to the IRS within twenty days of the closing.

A critical part of the process entails a clear line of communication between the parties involved: the foreign seller should make it clear to the buyer and/or the closing agent that an application for an 8288B Withholding Certificate will be made. Sometimes a closing agent will hold the withheld funds for only a certain number of days before sending them to the IRS, failing to notify the seller since they did not know there was an 8288B Application in the works. This mistake may greatly delay the return of funds to the seller.

Farshchian Law Can Help With Any FIRPTA-Related Matters

Based in the globally popular real estate market of Florida, our real estate attorneys have experience handling FIRPTA transactions and applying for 8288B Withholding Certificate. Because FIRPTA is a federal matter, the property can be located anywhere in the United States. We can also serve as the closing and escrow agent, keeping all parties in the loop while making sure that the IRS regulations are followed with the utmost efficiency and timeliness.

If you are a Realtor, buyer or seller involved in a FIRPTA transaction, Please call us at (800) 604-1871 or email us at Info@JFRealEstateLaw.com.