Beware FIRPTA: Buying and Selling Florida Real Estate by Non-Residents
Florida law does not impose restrictions on the purchase of real estate by foreign investors. Foreign investors may take title to Florida real estate in their individual names or in an entity (LLC or corporation). The challenge for foreign investors arises when the investor decides to sell the property. The Foreign Investment in Real Property Tax Act (“FIRPTA”) can really complicate these sales and the savvy foreign real estate investor will prepare in advance to minimize problems at closing. FIRPTA was enacted in an effort to curtail lost capital gain tax revenue from the sale of real property by foreign individuals and entities. Unfortunately, compliance with FIRPTA is very complicated and it can delay property sales as well as require closing agents to withhold and/or pay more tax than is really owed on the capital gains resulting from the sale.
The sale of Florida real estate by a foreign owner is subject to tax on the capital gain (profit made on the sale of the real estate). To ensure that this tax is paid by a foreign owner who may have severed his only connection to the U.S. by way of this sale, FIRPTA requires a withholding tax apply at the time of sale. This tax withholds 10% of the gross sale price, which means that 10% is withheld even if you sell the property at a loss or the tax on the capital gain would be less than 10% of the gross sales price. In order to recover any portion of the 10% that exceeds the amount actually owed under capital gains tax, the seller must wait until the end of the year and file for a refund. FIRPTA applies to both individuals and entities, who hold direct or indirect interests in Florida real estate.
The most common way to mitigate the FIRPTA tax is to apply for a “withholding certificate.” The grounds for requesting this reduction are that the amount withheld exceeds the actual capital gain tax liability. If the application is submitted prior to the closing date on the transaction, the 10% that is withheld is paid into escrow with the title company handling the sale. The title company then retains the funds until they receive a letter from the IRS confirming the reduced amount. The IRS then receives the appropriate portion of the funds in full satisfaction of the capital gain tax, and the remainder is remitted to the seller.
Unfortunately, the process of applying for the withholding certificate is very time consuming. The IRS regulations require an international taxpayer identification number (“ITIN”) be supplied by the foreign seller/transferor as well as by the foreign or domestic buyer/transferee, (taxpayer identification number (“TIN”), if domestic) on the application for a withholding certificate. If an ITIN/TIN is missing from the documents required for a withholding certificate, then the buyer/transferee must withhold the 10% and remit the funds to the IRS within 20 days of closing. Adding to the difficulty of this process is the fact that after submitting an application for an ITIN, it can take anywhere from 5 weeks to 3 months for an ITIN to be assigned. Foreign purchasers of Florida real estate would be wise to obtain the ITIN before listing their property for sale to make sure that they are in the position to file for a withholding certificate at or prior to closing. Waiting to apply for an ITIN until you sign an agreement of sale to sell your property may be too late. Contact real estate attorney Marlyn J. Wiener to assist you with your purchase or sale of Florida real estate.