There are many different aspects of FIRPTA and a FIRPTA affidavit. Therefore, in this article, we will be discussing the working of FIRPTA and what are some of the common challenges associated with FIRPTA.

Working of FIRPTA
The first thing that is determined during a transaction of a property in the USA is that whether the seller is a foreign person or a US person. If the seller is subject to the US taxes if the individual meets the substantial presence test:
The seller has spent at least 31 days in the USA during the current year.
The seller has been present in the USA for at least 183 days during the 3 years, including the current year and the two years before that.

These calculations can be challenging for people who do not have much experience in dealing with such transactions. If the calculations indicate that the seller is not a foreign person, then it is necessary to file for FIRPTA affidavit that will establish the fact that the seller is a US person and does not have a foreign status.

Common FIRPTA Mistakes
It is quite understandable that a variety of factors can go wrong in FIRPTA because you have to make different calculations and consider different aspects during this process. A common issue associated with FIRPTA is when the seller is a limited liability corporation (LLC) and has a single member.

In such a situation, many people tend to assume that the seller is a US person and is exempted from FIRPTA withholding tax because the LLC is established in the USA. However, if the LLC has only one member, then you have to determine the status of that one particular member. In other words, you have to find out whether the member is a foreign person or a US person by using the rules discussed above because the status of the LLC’s member is important, and not the location of the LLC.

Some of the other common issues are:
Even if the property is being sold at a loss, you will not get exempt from the FIRPTA withholding tax.
If a foreign seller is selling the property to a foreign buyer, it does not have any impact on the transaction and FIRPTA will still be applicable. Moreover, both of them involve parties must have a valid taxpayer identification number to complete the sale.

It is the responsibility of the seller to be fair and transparent in this process. As long as the buyer does not have any knowledge that the seller is making any false statement regarding their status, the buyer can fully rely on the FIRPTA affidavit that will be signed at the closing of the transaction.

Mitigating the Tax Obligation
You should know that you mitigate the withholding tax or even eliminate it with the help of proper planning and supporting it with an official document called a withholding certificate. This certificate is used by the seller when the underlying tax liability by selling the property is lesser than the amount of the FIRPTA withholding. You should also attach supporting documents with the withholding certificate to support your claims.
It is important to note that the seller has to apply for a withholding certificate through Form 8288-B at IRS before or on the date of closing. If this certificate is not approved by the IRS at the time of the transaction, then the decision might be issued at a later stage, or you might get the denying letter from the IRS.
You should hire an attorney as your withholding agent so that you have higher chances of getting a withholding certificate approved from the IRS and deal with the various aspects of the application.

Conclusion
Once it is determined that whether the seller is a foreign person or a US person, it becomes easier to deal with FIRPTA withholding. The next step should be considering the value of the property so that you can determine the exact FIRPTA withholding applicable to the transaction. The entire process might seem overwhelming to you, but you can make it easy by going through the steps one by one.
The bottom line is that FIRPTA is an essential component of property transactions in the USA. You should be relying on the help of professional and legal attorneys to avoid facing various issues associated with FIRPTA withholding. Moreover, you should remember that the best time to prepare for a FIRPTA affidavit is at the very start of the transaction and when you decide to sell your property. As a result, you will not face any unnecessary delays in the transaction and complete it successfully as per the legal rules and regulations.

Source Link-
https://freedomtaxaccounting.com/when-is-firpta-affidavit-required/