Real Estate Agents are uniquely placed to take advantage of the solutions offered to their clients when faced with the consequences of FIRPTA.
FIRPTA is short for the Foreign Investment in Real Property Tax Act. It affects property sold with a value greater than $300 000 or if the purchaser is not living in the home as their primary residence.
If a foreign national sells a property that meets these requirements, then 15% of the sales price is retained to cover any taxes due. If the property is held in a trust, then the retention increases to 35%.
What Can You Do to Avoid This?
There are various legal structures that one can use to avoid being liable under FIRPTA.
- Purchasing the property in an LLC with more than one partner.
- Make use of a trust structure set up by an accountant before the sale
- Utilize a 1031 exchange.
- Use the property as the buyers’ primary residence for more than 6 months each year.
Why Would the Seller and Buyer Want to Avoid FIRPTA?
FIRPTA is not a tax, it is rather a retention of funds, set off against one’s tax liability. The IRS uses the retention to cover any taxes due by the foreign seller. Should the taxes be less than the tax due, then the seller receives a refund.
The seller is therefore prevented from accessing their funds until the tax return is finalized, which may take many months or years. During this time, they lose the opportunity cost of the funds held by the IRS.
The buyer is placed at risk because they are ultimately liable under the statute. It is their responsibility to establish whether the transaction falls under FIRPTA and if it is, then a lien is executed over the property until the funds are paid over to the IRS.
The buyer has to make sure that the funds are paid over to the IRS.
But the risk doesn’t end there.
Both the escrow agent and the realtor are also possibly liable for the retention. It is thus in everybody’s interest to establish the non-foreign status of the parties to the transaction.
The benefits of Buying Property in a Company
As an investor, there are numerous benefits to purchasing your property in a company.
There is a separation of your investment assets from your personal assets, thus reducing the risk of personal liability should a problem occur.
There are various tax incentives available to property investors that make the cost of acquisition very attractive.
The use of companies and trusts is a well-established mechanism to structure one’s financial affairs to avoid onerous inheritance taxes and provide estate planning flexibility.
And it is also possible to avoid liability for retentions under FIRPTA.
Moses Nae, CEO of TaxLeaf, Contador Miami, and the founder of Contador America is passionate about helping foreign investors and business owners buy an existing business, open a new business, or invest in franchise businesses.
To avoid unnecessary costs and to reduce taxes, it is crucial that you consult with a knowledgeable and experienced tax accountant to help guide you through the process.
Here’s what one successful business owner has to say about the service and support they receive from being partnered with TaxLeaf:
Cesar Buenavista, Doral, Fl
“I am an Account Manager with TaxLeaf and have been working with clients for more than 6 years. The technology they provide is incredible. I have access to everything from my phone if I need it. They are very professional and provide excellent support for me and my employees.”
To help you learn more about how TaxLeaf can assist you in investing in property the right way, stop what you’re doing right now and call us now to secure a FREE 30-Minute Consultation with one of our tax experts.