Foreign investors frequently use Limited Liability Companies (LLCs) to hold U.S. real estate, including residential, commercial, and vacation properties. While LLCs may offer liability protection and some tax flexibility, they do not automatically exempt foreign sellers from FIRPTA (Foreign Investment in Real Property Tax Act) withholding. Understanding how FIRPTA applies to LLCs is essential for title companies and real estate agents to ensure compliance and prevent last-minute closing issues.
Understanding LLCs in Real Estate
An LLC (Limited Liability Company) is a popular business structure in real estate, offering protection to its owners—known as members—from personal liability related to the company’s debts and obligations. LLCs can be taxed in a variety of ways depending on the number of members and the elections they make. For simplicity, let’s break it down into three main types:
- Single-Member LLC (SMLLC): Owned by one individual or entity and typically classified as a disregarded entity for tax purposes.
- Multi-Member LLC (MMLLC): Owned by two or more members, with the default tax classification being a partnership.
- “Check the Box” LLC: A Single-Member LLC or Multi-Member LLC can make an election to be treated as a corporation for tax purposes by filing IRS Form 8832. Although it maintains the LLC as part of its name, it is taxed as a corporation.
The classification of the LLC plays a significant role in whether FIRPTA applies when a foreign investor sells U.S. real estate.
When Does FIRPTA Apply to LLC Sales?
- U.S. Single-Member LLCs (Disregarded Entities) may be subject to FIRPTA:
FIRPTA may apply to a Single-Member LLC if the owner is a foreign individual or entity. This is because, for tax purposes, a Single-Member LLC is considered a disregarded entity, meaning it is not separate from its owner. As a result, the LLC’s ownership of U.S. real estate is treated as if the foreign owner directly holds the property. - U.S. Multi-Member LLCs are not subject to FIRPTA:
A US LLC with more than one member is typically classified as a partnership and falls under the category of a US person for tax purposes. The tax status of each member is irrelevant for FIRPTA. Other types of withholding may apply to partnerships with foreign members, but it is usually handled at the partnership level and not at the sale level. - C-Corporation LLCs Are Not Subject to FIRPTA:
If a U.S. LLC chooses to be taxed as a C-corporation, it is treated as a U.S. entity, meaning FIRPTA does not apply when a property is sold. In this case, the members of the LLC become shareholders, and their status as a foreign or U.S. person is no longer a factor. While this structure is less common, title and real estate agents must still be aware of it when dealing with transactions.
Key FIRPTA Considerations
- Determine the Seller’s Tax Classification Early
- Verify whether the LLC is a disregarded entity, partnership, or corporation.
- If the LLC is a disregarded entity, identify if the member is a foreign person or entity.
- If an LLC’s classification has changed, there should be evidence that IRS Form 8832 was filed and approved by the IRS.
- Withholding May Still Apply Even If the Seller Takes a Loss
- FIRPTA withholding is based on the gross sales price, not the seller’s profit or loss.
- Even if a foreign investor sells the property at a loss, withholding is still required unless an exemption applies.
- Buyers Are Responsible for FIRPTA Compliance
- If the required FIRPTA tax is not withheld and remitted, the buyer (not the seller) becomes liable for the tax.
- Title companies and real estate agents should ensure buyers understand their withholding obligations before closing by directing them to a trusted FIRPTA tax advisor.
- Other Considerations
- Be careful not to rely on a state-operated website to determine how an entity is taxed at a federal level. They can be inaccurate and easily manipulated.
- If a seller is not able to determine the status of their LLC, clues can be gathered by reviewing the operating agreement, EIN assignment letter, or by reviewing the tax return filed by the LLC.
Why FIRPTA Compliance Matters for Real Estate Transactions
Title companies and real estate professionals play a critical role in ensuring FIRPTA compliance for transactions involving foreign sellers. Failure to comply can result in IRS penalties, delayed closings, and tax liabilities for buyers.
Final Thoughts
If you are handling a real estate transaction involving a foreign seller who owns property through an LLC, it is crucial to verify their status early, confirm FIRPTA obligations, and ensure proper withholding is applied. Being proactive helps avoid legal risks, protects clients, and keeps transactions running smoothly.
Need guidance on FIRPTA compliance for LLC? Contact us today for expert assistance!