FIRPTA stands for the Foreign Investment Real Property Tax Act. It requires foreign persons in the United States to pay income tax on dispositions (sales) of real property.
Why do we have FIRPTA?
Where domestic citizens get capital gains money from their income tax, foreign citizens only get taxed on certain items. These taxed items are rarely capital gains items like real estate. FIRPTA allows the government to get its proper share when a foreigner sells real estate.
Tax withholding occurs when the buyer gives some fraction of the sales price to the federal government. In the case of FIRPTA, buyers are required to withhold 10% of the sales price for the IRS. If the taxes are lower than that, the seller will get refunded the difference.
Some states require an additional withholding to pay to the state, regardless of if FIRPTA applies or not. This is just something to keep in mind when selling your home in general.
It is possible to be exempt from this law. You may be exempt in the following cases:
The seller proves that they are not a foreign citizen.
The buyer can get a withholding certificate that proves to the IRS that they are exempt from the withholding.
The seller realizes 0% interest on the sale.
The sales price is less than $300,000 and the buyer plans to live in the home for at least half of the first 2 years after the transfer.