The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) guides real property sales when the seller is a foreign national who sells their ownership or interest in a U.S. real property interest.

FIRPTA requires that sales that involve a foreign national seller must include withholding of either 10 or 15 percent of the seller's gain from the sale. The majority of dispositions will fall under the 15 percent withholding requirement unless they qualify for an exception.

The buyer of the property is generally the withholding agent. The purpose of withholding is to ensure the seller pays their share of taxes related to the property sale.

The realized sum can be the cash paid from the sale or the fair market value of the transferred property. For example, a foreign seller disposes of a property and realizes a $100,000 profit. The buyer must withhold $15,000.

Actual Tax Due

The question becomes what happens if the withholding amount exceeds the actual tax due. One way to claim the overpaid amount is by filing taxes.

The withholding amount is an estimate. It isn't the actual tax due, and if a foreign seller files a tax return, that return will determine the actual tax due. Due to deductions and other policies, an individual may owe less than the required 15 percent withholding.

Individuals cannot reduce the required withholding amount because they know or believe they owe less than the required withholding percentage. It's only through filing a tax return and including the relevant documents that an individual can claim the monetary difference between the withholding amount and the actual tax due.

Withholding Certificate

When a foreign seller believes the total tax owed is less than the required withholding amount, they may request a withholding certificate from the IRS. This certificate may either reduce or eliminate withholding.

Exceptions to Withholding

Individuals may be able to skip withholding altogether in certain situations. For example, when the buyer intends to use the purchased property as a primary residence for at least 50 percent of the year, and the amount realized is less than $300,000.

In these situations, withholding and actual tax due shouldn't come into play.

If you have questions about FIRPTA, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.