Navigating FIRPTA: Unlocking the Residential Exemption for Buyers and Sellers 🏡💼

[Bruce D. Kowal]

Navigating FIRPTA: Unlocking the Residential Exemption for Buyers and Sellers 🏡💼

When it comes to buying U.S. real estate from foreign sellers, the Foreign Investment in Real Property Tax Act (FIRPTA) can feel like a complicated hurdle. FIRPTA requires buyers to withhold 15% of the gross sale price when a foreign seller disposes of a U.S. real property interest. This can create challenges for both buyers and sellers, especially when funds are tied up unnecessarily.

But did you know there’s a way to avoid FIRPTA withholding in certain cases? Enter the Residential Exemption. 🙌

What Is the Residential Exemption?

The Residential Exemption allows buyers to bypass FIRPTA withholding if specific conditions are met. Here’s how it works:

1️⃣ Sale Price: The purchase price must be $300,000 or less.


2️⃣ Buyer’s Intent: The buyer (or a family member) must have a bona fide intent to use the property as a primary residence.


3️⃣ Occupancy Requirement: The buyer must occupy the property for at least 50% of the days it is used during the first two years after the sale.

If these conditions are satisfied, the 15% FIRPTA withholding is waived. This can be a game-changer for foreign sellers and an attractive incentive for buyers.

Why Does This Matter?

🔑 For Buyers:

* You get to keep more cash at closing instead of withholding a large portion of the purchase price for FIRPTA compliance.

* The Residential Exemption can make financing easier and reduce administrative burdens.

🔑 For Sellers:

* Foreign sellers no longer have to deal with the complexities of recovering over-withheld amounts by filing U.S. tax returns.

* It’s an attractive selling point for properties under $300,000, especially to buyers intending to live in the home.

Key Considerations for Buyers

While the Residential Exemption is a powerful tool, it’s not automatic. Buyers must:


✅ Certify their intent to use the property as a primary residence.


✅ Document their compliance, including proof of residency (e.g., utility bills, driver’s license).


✅ Understand their liability: If the exemption conditions aren’t met, the buyer may be held responsible for the FIRPTA withholding, plus penalties and interest.

When Does This Exemption NOT Apply?

❌ If the sale price exceeds $300,000, the exemption doesn’t apply—even if the buyer intends to use the property as a residence.


❌ For commercial properties or properties purchased solely for investment purposes.

Why This Matters for Real Estate Professionals

For real estate agents, syndicators, and tax advisors, understanding FIRPTA and the Residential Exemption can help you:
💡 Educate your clients about their options.
💡 Streamline transactions for foreign sellers.
💡 Provide strategic advice to buyers looking for affordable residential options.

By positioning yourself as a resource on FIRPTA compliance, you can build trust and differentiate yourself in the competitive real estate market.

Takeaway

The FIRPTA Residential Exemption is a win-win for buyers and foreign sellers in the U.S. real estate market. 🏘️ Whether you’re buying, selling, or advising, proper planning and documentation are critical to leveraging this powerful tool.

Reality Check!!!

$300,000 is incredibly low, especially in high-cost areas like the New York Metro region, where property values far exceed this threshold. For properties above the FIRPTA Residential Exemption limit, you’ll need to explore other strategies to minimize withholding while staying compliant.

There will be follow up posts on best practices for handling properties that don’t qualify for the $300,000 exemption.

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