Top 5 FIRPTA Mistakes People Make
Navigating the Foreign Investment in Real Property Tax Act (FIRPTA) can be a complex and daunting task for many. Without proper guidance, individuals often encounter significant challenges and pitfalls. To help you avoid these issues, we’ve identified the five most common mistakes people make when dealing with FIRPTA. Here’s a comprehensive list of those mistakes, along with insights to ensure a smoother process.
Not Assuming FIRPTA Applies to Every Sale
The seller being a US person is considered an exception to FIRPTA. So, until they certify they are not foreign, or one of the other exceptions can be used, FIRPTA does apply. Assuming FIRPTA applies to every sale is the safest way to ensure withholding requirements are met.
Not Using an Experienced Tax Professional
You wouldn’t visit a cardiologist to perform brain surgery just like you wouldn’t visit a brain surgeon to repair your heart. FIRPTA is a specialty that should be handled by the pros.
Not Understanding the Role That Each Party Plays
FIRPTA is a tax that applies when the seller is foreign, but withholding the tax is the buyer’s responsibility. If you know your role, you can set up realistic expectations and make sure deadlines are met. Assuming someone else is handling the FIRPTA requirements is a common mistake that leads to unnecessary penalties.
Not Understanding the Exceptions
FIRPTA tax laws require the buyer to withhold up to 15% of the sales price. However, there are exceptions that can reduce or eliminate the withholding altogether. Understanding how the exceptions work can significantly impact a transaction and in some cases, make or break a deal.
Not Understanding the Deadlines
Buyers are responsible to submit the FIRPTA tax withholding within 20 days from the closing to avoid penalties Sellers only have a limited time to claim a rebate of any overpaid tax; 3 years from the date the tax return is due or 2 years from when the tax was paid, whichever is later. Understanding the deadlines and the damage caused by not meeting them is critical for a successful transaction.
These five common FIRPTA mistakes—assuming FIRPTA applies to every sale, not utilizing an experienced tax professional, misunderstanding the roles of each party, overlooking exceptions, and failing to grasp deadline can lead to significant challenges and costly errors. Understanding these pitfalls is crucial for a smooth transaction process, ensuring that you navigate the process confidently and effectively. Let us help you avoid these mistakes and achieve a successful outcome!