FORM 22E is a short but legally multifaceted form also known as the FIRPTA form
FIRPTA, which was established in 1980 stands for Foreign Investment Real Property Tax Act. This is essentially a prepayment of anticipated tax due on the gain of the sale of a U.S. real property interest. A refund may be issued when taxes are filed, if an overpayment is made. However, this depends on individual tax situations. By signing the form, the seller swears under penalty of perjury that they “are” or are “not a nonresident alien” for purposes of United States income taxation.
Prior to Listing real property for sale in the U.S. Foreign sellers and their Real Estate agents, need to be informed and prepared for FIRPTA. This includes, consultation with a U.S. accountant and or legal counsel to ascertain the need for an ITIN when the property is initially purchased.
- This document should always be completed and included in the seller’s listing packet of documents uploaded to the MLS.
- You should never include the seller’s tax identification on the uploaded document. However, the seller must provide it prior to closing.
- If the Seller doesn’t have an ITIN, they can submit form W-7 to the IRS (see instructions). This ITIN is required to close escrow and can take about 7 weeks to process. Because of this, the seller should apply if needed, prior to the listing going on the market.
- If Seller fails to provide the FIRPTA certification to the Closing Agent within 10 days of mutual acceptance. Buyer may give notice that Buyer may terminate the Agreement at any time 3 days thereafter.
- When the Buyer Broker writes an offer, the broker pulls the form off the listing documents, references the form signed by seller and properly marks the FIRTPA Form 22E, and puts it in the Buyer Broker Firm’s Transaction Folder.
What is the purpose of withholding Tax?
For domestic citizens, capital gains tax money is taken out of regular income tax. However, some nonresident aliens are not taxed on most capital gains items like real estate. This could be problematic come tax time. As a result, FIRPTA was established ensuring the government gets their piece of the pie when a foreign person U.S. sells real estate.
The IRS defines a Nonresident Alien for federal income tax purposes as an individual who is neither a U.S. citizen nor a resident of the U.S. The IRS defines a Resident Alien as an individual who is a resident of the U.S. for federal income taxes, if they have received a green card at any time during or prior to the calendar year and or meet the “substantial presence test” in the U.S.
Buyers Be Aware:
- The IRS designates the Buyer as the Withholding Agent. Therefore, it is the Buyer’s responsibility to do the withholding and send the monies to the IRS.
- As a matter of course, the Buyer can instruct the Settlement Agent to do this withholding. The Settlement Agent, on behalf of the Buyer, will remit the amount withheld directly to the IRS.
- If the FIRPTA withholding is not done, or done incorrectly, the Buyer may be liable for the tax and penalties. Therefore, Buyers and Sellers should use a Settlement Agent that is knowledgeable and experienced in this law.
- It is the buyer’s responsibility to complete forms 8288 and the 8288A these require the Buyer’s name, address and ITIN as they are the “Withholding Agent”.
- Certain exceptions may apply that exempt the buyer from withholding and can be found here; IRS – Exceptions from FIRPTA withholding.
The settlement agent’s role:
- If the buyer has determined FIRPTA withholding applies, the buyer and seller may mutually instruct the settlement agent to:
- Gather the applicable forms.
- Deduct the monies from the Seller’s Proceeds.
- Remit the monies, on the Buyer’s behalf, to the IRS.
- The Settlement Agent is not licensed or authorized to prepare the IRS forms.
- To view the forms you can follow this link: IRS Forms for Reporting and Paying Tax on U.S. Real Property Interests.
- Escrow personnel and Real Estate Agents are not qualified to provide advice on individual taxpayer’s situations.
- Escrow Personnel cannot provide legal advice.
This Blog is for general information and educational purposes only. Rainier Title is not offering nor intending to offer this as legal advice, opinion or tax advice.