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FIRPTA's Impact on a Foreign Buyer's Florida Mortgage

Q: What is the purpose of the Foreign Investment in Real Property Tax Act (FIRPTA)?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: Who is responsible for handling the FIRPTA withholding in a real estate transaction?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: How is the standard FIRPTA withholding amount calculated?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: Are there exemptions that can reduce or eliminate the FIRPTA withholding?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: How does FIRPTA affect getting a mortgage?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: What is a FIRPTA Withholding Certificate?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: Does FIRPTA apply to a cash-out refinance transaction?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

Specialized In Jumbo Loans, Investor Loans, DSCR Loans, Non-QM Financing, Commercial Mortgages, and Tax-Informed Lending Strategies

Published By

David Ghazaryan

Owner / Broker / Banker

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TL;DR

FIRPTA requires a 15% tax withholding on the sale price when a foreign person sells United States real estate.
This future tax liability can influence your initial mortgage strategy and how you decide to hold the property title.
Exemptions exist, but understanding them is crucial for planning your investment in cities like Orlando and Kissimmee.

What is the Foreign Investment in Real Property Tax Act?

The Foreign Investment in Real Property Tax Act, commonly known as FIRPTA, is a United States tax law enacted in 1980. Its primary purpose is to ensure that foreign persons pay U.S. income tax on the gains they make from selling U.S. real estate. It is not an additional tax but rather a withholding mechanism to enforce the collection of existing capital gains taxes.

When a non-U.S. citizen sells property, the law requires the buyer to act as a withholding agent. The buyer must withhold 15% of the gross sales price and remit it to the Internal Revenue Service (IRS) within 20 days of the closing. This happens regardless of whether the seller actually made a profit on the sale.

Example: A foreign national sells their vacation home in Kissimmee for $500,000. The buyer is legally obligated to withhold $75,000 (15% of $500,000) and send it to the IRS. The foreign seller then files a U.S. tax return the following year to report the sale. If their actual capital gains tax was only $30,000, they would receive a $45,000 refund from the IRS. If they had a capital loss, they could potentially receive the entire $75,000 back. FIRPTA ensures the IRS holds the funds while the tax liability is calculated.

How FIRPTA Affects a Non-U.S. Buyer in Orlando

While FIRPTA is a seller's tax issue, it places a significant legal and financial responsibility squarely on the buyer. If you are purchasing a property in Orlando from a foreign person, you are the designated 'withholding agent'. Your failure to withhold and remit the required amount can result in severe penalties, making you personally liable for the tax that should have been paid.

Understanding FIRPTA when buying property in Orlando

Because of this, title companies and closing agents are extremely diligent in determining the seller's residency status. As a buyer, you will be required to sign an affidavit at closing, and the title company will typically handle the process of collecting the funds from the seller's proceeds and sending them to the IRS on your behalf. Understanding this process is critical because it is a non-negotiable part of the closing when purchasing from a foreign seller. It is a fundamental rule that shapes the transaction from the start.

Does Your Mortgage Lender Care About Future FIRPTA Withholding?

For the most part, a mortgage lender's underwriting process is not directly concerned with a future FIRPTA withholding event. Their primary focus is on your ability to repay the loan based on standard qualification criteria:

Income and Employment: Verifying you have stable and sufficient income to cover the mortgage payments.
Assets: Ensuring you have enough funds for the down payment, closing costs, and reserves. (The data, information, or policy mentioned here may vary over time.)
Credit History: Assessing your creditworthiness, which can be complex for foreign nationals who may not have a U.S. credit file.

Lenders are underwriting the loan for you, the borrower, not the property's potential future sale. However, a knowledgeable mortgage strategist who specializes in foreign national loans will absolutely discuss FIRPTA with you. They understand that your long-term investment strategy is important. Planning for this future tax liability can influence key upfront decisions, such as the size of your down payment or the way you choose to hold title to the property. While it won't be a line item on your loan application, it is a critical part of a holistic and intelligent financing strategy.

Are There Exemptions to FIRPTA Withholding in Kissimmee?

Yes, several important exemptions can reduce or completely eliminate the 15% withholding requirement. These rules are uniform across the United States, applying just as much to a property in Kissimmee as anywhere else. The most common exemption for residential buyers is based on the purchase price and the buyer's intended use of the property.

Primary Residence Exemption

This is the most significant exemption for individual buyers. The withholding amount changes if the buyer certifies they intend to use the property as their primary residence for at least 50% of the time it is in use during the first two 12-month periods after the transfer.

Sales Price $300,000 or Less: If the property will be your primary residence, the FIRPTA withholding is waived entirely. No withholding is required.
Sales Price Between $300,001 and $1,000,000: If the property will be your primary residence, the withholding is reduced from 15% to 10%.
Sales Price Over $1,000,000: The 15% withholding rule applies regardless of the buyer's intended use.

(The data, information, or policy mentioned here may vary over time.)

Example: You are a U.S. citizen buying a home in an Orlando suburb from a German national.

If the purchase price is $295,000 and you sign an affidavit stating your intent to live in it, there is zero FIRPTA withholding.
If the purchase price is $450,000 and you intend to live in it, you are required to withhold 10% ($45,000).
If the purchase price is $450,000 but you plan to use it as a rental property, you must withhold the full 15% ($67,500).

Structuring Property Ownership to Plan for FIRPTA

How you take title to your U.S. property is a critical decision that can have significant tax and legal implications, including how FIRPTA is handled down the line. While this is a topic for a qualified tax advisor and attorney, it is essential to understand the basic concepts when planning your purchase and mortgage.

Planning property ownership to account for FIRPTA tax law

Individual Ownership vs. a U.S. Corporation

Holding the property in your individual name is the most straightforward approach but also means a future sale will be subject directly to FIRPTA. Some foreign investors choose to create a U.S. corporation to own the property. In this structure, the U.S. corporation owns the real estate. A sale of the property by the corporation would still be subject to FIRPTA rules if the corporation is considered a 'U.S. real property holding corporation'. The tax implications of using a C-Corporation are complex, involving corporate income tax and other considerations.

The Role of a Limited Liability Company (LLC)

An LLC is a common vehicle for holding investment property. However, for a single foreign owner, the IRS may treat the LLC as a 'disregarded entity' for tax purposes. This means the IRS essentially looks through the LLC and treats the sale as if it were made by the foreign individual directly, triggering the standard FIRPTA withholding. The rules become more complex for multi-member LLCs. Structuring ownership is not a do-it-yourself task; it requires expert legal and tax guidance to avoid costly mistakes.

What is a FIRPTA Withholding Certificate and How Do I Get One?

A FIRPTA Withholding Certificate is a document issued by the IRS that authorizes a reduced amount of withholding or, in some cases, a complete exemption from it. This is a powerful tool for a foreign seller who knows their actual tax liability will be much lower than the standard 15% withholding.

How to Apply for a Withholding Certificate

The seller applies for the certificate by filing IRS Form 8288-B, 'Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests'. This form must be submitted to the IRS on or before the date of closing. The primary reasons for an application include:

The seller's calculated maximum tax liability is less than the 15% withholding.
The seller had a capital loss or a zero gain on the sale.
The transaction qualifies for a non-recognition provision under the Internal Revenue Code.

The IRS generally acts on these applications within 90 days. During this period, the closing agent can hold the withheld funds in an escrow account instead of immediately sending them to the IRS. If the certificate is granted, the agent can then disburse the funds according to the IRS's instructions.

How FIRPTA Impacts a Future Cash-Out Refinance

This is a common point of confusion, but the answer is clear: FIRPTA does not apply to a cash-out refinance.

FIRPTA is triggered by a 'disposition' of a U.S. real property interest, which means a sale or transfer of ownership. A refinance is a loan transaction, not a sale. When you do a cash-out refinance, you are simply replacing your old mortgage with a new, larger one and receiving the difference in cash. The title to the property does not change hands; it remains in your name (or your entity's name). Therefore, since there is no sale, there is no FIRPTA event and no withholding requirement.

Finding Professional Advice for FIRPTA Compliance

Successfully navigating a real estate transaction involving FIRPTA requires a team of qualified professionals. Attempting to manage this without expert guidance is unwise and can lead to significant financial penalties.

Your essential team should include:

Mortgage Advisor: A professional experienced in foreign national loans can help you structure your financing with a full understanding of your unique circumstances.
Real Estate Agent: Work with an agent who has a proven track record of handling transactions with international clients.
Title Company or Closing Agent: They are on the front lines of executing the withholding and will be a key resource.
Tax Advisor or CPA: This is the most critical professional for planning, applying for a withholding certificate, and filing the necessary U.S. tax returns.
Real Estate Attorney: Essential for advice on how to structure ownership and for reviewing all legal documents.

Navigating the complexities of FIRPTA while securing a mortgage requires a strategy aligned with your long-term goals. If you are ready to explore your options for financing a property in Florida, Apply now to connect with a specialist who understands the landscape of foreign buyer financing.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.