Avoiding FIRPTA with 1031

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Avoiding FIRPTA with 1031

Hiroe H.
Member since 2023 · 2 posts · 0 votes

Hi! I am trying to do 1031 exchange.  The house which we're trying to sell has 2 owners, a foreigner and an US citizen.

1) Does FIRPTA 15% withholding apply to us? or it's not required since the US citizen can file taxes?

2) If FIRPTA applies to us, I'd want to avoid the FIRPTA with a 1031 exchange. One way I read online which is confusing to me is buying a property for our personal residence with the sales price not exceeding $300,000. This sounds like a conflicting fact to me since 1031 rule says that both houses need to be for investment purpose. How can this be?

3) Another option we can do is to do a QuitClaim deed to remove the foreigner. Would we be still qualified for 1031 exchange after QuitClaim deed?

I'd appreciate if someone could answer to even one of the above questions.

Thanks in advance!

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    • Dave FosterBusiness Member
      Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
      3y

      @Hiroe H., FIRPTA can be avoided if the buyer of your old property signs an afadavit that they will occupy it as a primary residence.  And the sales price is less than $300K.

      The only other way to avoid FIRPTA is with a 1031 exchange.  But to do so it will need to be a simultaneous exchange where your sale and your purchase are both lined up and closing within a day or two of each other.

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    • Bill ExeterBusiness Member
      1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
      3y

      Hi @Hiroe H., 

      FIRPTA would likely apply to the foreign owner but not to the US citizen.  Selling a property that is your personal residence with the sale price not to exceed $300,000 is one of the exceptions to FIRPTA withholding, but does not apply to rental, investment or business use properties.  

      You can be exempt from FIRPTA withholding through a 1031 Exchange, but you must obtain a Certificate of Exemption.  This process has become significantly more complicated.  

      Generally, you sell your property, the closing agent withholds 15%, you apply for the Certificate of Withholding from the IRS (but you will not receive it in time), so you must either pay tax on the 15% that was withheld and not reinvested through the 1031 Exchange or contribute out of pocket cash to self fund the 15% withholding so that your 1031 Exchange has 100% of the net cash proceeds and can complete your 1031 Exchange. 

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    • Hiroe H.
      OP
      Member since 2023 · 2 posts · 0 votes
      3y

      Thank you for the quick and informative answer!

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