FIRPTA (Foreign Investment in Real Property Tax Act) subjects a foreign seller of US real estate to a withholding tax of 10% of the gross sales price. This withholding tax is deducted from the net proceeds due to the seller and the Internal Revenue Service (IRS) requires it be remitted to the Internal Revenue Service (IRS) no later than 20 days after closing. While most of the time the determination of the foreign status of a seller is clear, there are times when this status is not quite so obvious. This is often the case when the seller is a limited liability company (LLC) formed in the US.
Limited liability Company with one owner (known as a single-member LLC)
A single-member LLC is a legitimate legal entity, but defaults to being disregarded for purposes of US income tax reporting. Any US income tax reporting is done in the name of the owner, not the name of the LLC. For example, if a foreign individual is the only owner of a US LLC, the US income tax reporting is done in the name of the foreign individual. In this situation, the FIRPTA withholding rules would apply because the seller, for purposes of FIRPTA, is the foreign individual, not the US LLC.
Limited liability Company with more than one owner
A US LLC with more than one owner defaults to being taxed as a partnership for US income tax reporting purposes. The withholding rules under FIRPTA do not apply to US LLCs taxed as partnerships as this does not fall under the definition of a foreign seller.
There are other withholding rules that apply in this situation (withholding rules pertaining to partnerships with foreign partners), but this withholding is done at the LLC level, not at the level of the sale of the U.S. real estate owned by the LLC taxed as a partnership.
As you can see, when dealing with U.S. limited liability companies, the applicability of the FIRPTA withholding is not evident and further inquiries may be needed to determine how FIRPTA applies to each unique situation. Hart & Associates is happy to advise you on the options available to you or your client in complying with FIRPTA requirements on the sale of your property.
Richard Hart EA, CAA
Hart & Associates
Offices in Las Vegas NV, Manhattan NY and Beverly Hills CA
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