FIRPTA withholding is a critical component of real estate transactions involving foreign investors in the United States. Manhattan real estate attorney Peter Zinkovetsky (https://www.avenuelawfirm.com/firpta-withholding-in-new-york/) of Avenue Law Firm offers detailed insight into how this federal tax requirement impacts foreign sellers and domestic buyers, particularly in the competitive New York real estate market. Through a detailed guide, Zinkovetsky clarifies the purpose and application of the Foreign Investment in Real Property Tax Act (FIRPTA), highlighting what buyers and sellers need to know to comply with federal tax laws.
The article stresses the importance of consulting a Manhattan real estate attorney when dealing with FIRPTA-related transactions. FIRPTA, enacted in 1980, mandates that foreign persons who sell or transfer U.S. real estate interests are subject to tax withholding. According to the IRS, the buyer is generally responsible for withholding 15% of the total sales price and submitting it to the federal government. This measure ensures that the IRS collects taxes due from foreign investors at the point of transaction, limiting the risk of nonpayment.
For real estate professionals and investors, having a Manhattan real estate attorney involved in the process can help clarify obligations. Peter Zinkovetsky explains that the withholding requirement applies broadly to foreign individuals, corporations, trusts, partnerships, and estates. U.S. citizens, permanent residents, and those who pass the Substantial Presence Test are not subject to FIRPTA, but determining a seller’s status is the buyer’s responsibility. Failure to withhold the appropriate amount can lead to significant penalties from the IRS, making proper verification essential.
Peter Zinkovetsky outlines several scenarios in which FIRPTA withholding may be reduced or even eliminated. For example, if a property is sold for $300,000 or less and the buyer intends to use it as a personal residence, the FIRPTA withholding requirement may not apply. There are also provisions allowing for a reduced withholding rate in cases where the tax liability is expected to be lower than the standard 15%. In such situations, the foreign seller can apply for a withholding certificate using IRS Form 8288-B to reflect the actual tax obligation more accurately.
In the blog post, Zinkovetsky emphasizes that "FIRPTA withholding cannot be offset by New York transfer taxes." This distinction is critical because it underscores the independent nature of federal and state tax liabilities. While buyers in New York may also be responsible for state transfer taxes, fulfilling those obligations does not impact the requirement to withhold under FIRPTA. Each tax is calculated and remitted separately.
One of the most vital responsibilities outlined in the guide is the buyer’s role as the withholding agent. This designation requires the buyer to determine if the seller is a foreign person, calculate the appropriate withholding amount, and remit the tax to the IRS using Forms 8288 and 8288-A. If a reduced withholding is requested, Form 8288-B and supporting documentation must be submitted to the IRS. The guide urges buyers to obtain a Non-Foreign Affidavit from sellers who claim exemption, which shifts the burden of compliance back to the seller.
Zinkovetsky further explores the consequences of non-compliance. Buyers who fail to properly withhold and remit taxes may be held liable for the unpaid amount, including interest and penalties. The IRS may also impose a “failure to withhold” penalty, equal to 20% of the amount that should have been withheld. For foreign sellers, non-compliance can trigger investigations and assessments of back taxes and penalties. Both parties must also file necessary tax documents and obtain a Taxpayer Identification Number (TIN) to complete the transaction legally.
While FIRPTA generally requires a 15% withholding, there are exceptions. If the property’s purchase price falls between $300,000 and $1,000,000 and the buyer will reside there, the withholding rate can be reduced to 10%. These exceptions aim to ease the financial burden on transactions involving primary residences, but they require specific conditions to be met and documented.
The guide concludes by reaffirming the importance of understanding FIRPTA obligations in New York real estate transactions. Buyers must be diligent in identifying the seller’s status and securing the appropriate documents to protect themselves from liability. Sellers should be aware of their rights to seek reduced withholding and the procedures required to obtain a certificate. By doing so, both parties can avoid costly missteps.
Peter Zinkovetsky and the team at Avenue Law Firm continue to provide guidance on FIRPTA and other real estate matters, reinforcing their commitment to supporting both foreign investors and local buyers through each stage of the transaction.
Investors, buyers, and real estate professionals handling New York property transactions involving foreign sellers should prioritize understanding FIRPTA requirements. Addressing tax obligations at the outset not only prevents legal issues but also facilitates smoother closings. Seeking help from a knowledgeable legal team like Avenue Law Firm, led by Peter Zinkovetsky, can provide clarity and support through each step of the process.
About Avenue Law Firm:
Avenue Law Firm, based in New York, offers legal services in residential and commercial real estate transactions. Led by attorney Peter Zinkovetsky, the firm helps clients navigate real estate laws and tax-related matters, including FIRPTA compliance. The firm serves local residents, investors, and foreign nationals involved in New York property transactions.
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