Since FIRPTA has no impact on a foreign citizen’s home purchase many foreigners don’t become aware of the possible tax implications until it comes time to sell their property. For the Foreign purchaser there really isn’t a difference in the purchasing process.
Selling a property is when a United States Foreigner would have to have an ITIN or meet one of the exceptions to FIRPTA withholding.
ITIN, An Individual Taxpayer Identification Number is a tax processing number issued by the Internal Revenue Service (IRS) to individuals who must have a federal taxpayer identification number but who don’t have or aren’t eligible for a Social Security Number.
Individuals who need ITINs include non-resident aliens and US resident aliens who need to file a federal tax return and are not eligible for a Social Security Number, dependents and spouses of a US citizen or resident alien, and dependents and spouses of non-resident alien visa holders.
ITINs are used solely for the purpose of helping individuals comply with federal tax laws and to provide the means to efficiently process and account for tax returns and payments for people who are not eligible for Social Security Numbers. ITINs do not authorize work in the United States or Social Security benefits and are not valid outside of the tax system.
FIRPTA, the Foreign Investment Real Property Tax Act, is a law enacted in 1980. Under FIRPTA, If a seller of real estate in Arizona is a non-U.S. citizen the buyer, real estate agent, escrow officer and/or attorney MUST insure approximately 10% of the sales price is withheld to be applied to the seller’s potential tax obligations pending a decision from the IRS. (unless an exemption applies). 26 U.S.C. § 1445(a)
The approximate 10% figure may adjust so be sure to consult a tax professional for current rates and guidelines.
It is also possible to have less than the approximate 10% withheld. Such reductions are often granted for:
- The sale of recently inherited property.
- A sale with a little or no profit or even a loss
- A tax free sale such as a 1031 exchange or trade of like-kind
Reductions require approval from the IRS. Approval can take several months and the title company will still withhold an approximate 10% pending the decision from the IRS in the meantime.
I am not a lawyer, nor am I a tax adviser. This post is intended to guide you to seek counsel from a tax Canadians finance a mortgage in Arizona