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NAVIGATING FOREIGN SELLERS: HOW FIRPTA WITHHOLDING AFFECTS YOUR 1031 EXCHANGE
FIRPTA stands for Foreign Investment in Real Property Tax Act, which requires foreign sellers of U.S. real estate to pay taxes on their capital gains. The law also requires the buyer of the property to withhold a portion of the purchase price and remit it to the IRS to ensure that the seller pays the required taxes.
Under FIRPTA, the buyer of a U.S. real property interest from a foreign person is generally required to withhold and remit to the IRS 15% of the gross purchase price. The gross purchase price is generally the total amount paid including any assumed liabilities or outstanding mortgages.
However, the actual amount of FIRPTA withholding can vary based on a number of factors, such as the type of property being sold, the purchase price, and the seller’s tax basis in the property. In some cases, the seller may be eligible for a reduced withholding rate or exemption from FIRPTA withholding if certain conditions are met, such as if the sale qualifies for a reduced withholding certificate from the IRS.
There are some ways to mitigate the impact of FIRPTA withholding on a 1031 exchange. For example, the seller can apply for a reduced withholding certificate from the IRS that reduces the amount of funds withheld. Additionally, the seller can work with a qualified intermediary who can facilitate the exchange and help structure the transaction in a way that minimizes the impact of FIRPTA withholding.
In the context of a 1031 exchange, FIRPTA withholding can reduce the amount of funds available to complete the exchange. If a foreign seller is subject to FIRPTA withholding, the buyer must withhold 15% of the purchase price, which can be a significant amount of money. If the seller plans to complete a 1031 exchange with the proceeds from the sale, the withheld funds may not be available to complete the exchange. They generally have to bring in new cash to complete the exchange for full tax deferral.
It's important to note that a 1031 exchange can be complex, and it's important to consult with a tax professional and qualified intermediary to ensure that the exchange is conducted properly and in compliance with IRS guidelines.