If you're considering using a Quitclaim Deed to avoid FIRPTA, think again. The IRS has already identified this as a tax avoidance scheme, and it won't work. Here are five reasons why this approach is not only ineffective but could also lead to further complications:
1. Quitclaim Deeds Don't Bypass FIRPTA
The IRS focuses on the economic substance of a transaction, not just the legal paperwork. Even if a property is transferred via a Quitclaim Deed, the IRS may still treat the foreign seller as the true owner and enforce FIRPTA withholding.
2. The IRS Can Reclassify Quitclaim Transfers as Gifts
If a foreign seller quitclaims the property to another individual or entity before a sale, the IRS may recharacterize the transfer as a gift. This can create additional tax issues, including U.S. gift tax implications and reporting requirements
.
3. You Can't Avoid a Tax You Already Owe
FIRPTA is a withholding tax, similar to payroll tax. It is not an additional tax but rather a prepayment toward any potential tax liability. When you file your U.S. tax return, you can claim the FIRPTA withholding against the actual tax owed-and if the withholding exceeds the liability, you may receive a refund. Trying to avoid FIRPTA doesn't eliminate your tax obligation; it only creates compliance risks.
4. Forming an LLC Before the Sale Won't Help
Some foreign sellers attempt to transfer the property into a newly formed LLC before selling it. However, the IRS may view this as a disguised sale or step transaction, meaning FIRPTA withholding can still apply. Additionally, forming an LLC purely for tax avoidance may result in IRS scrutiny, penalties, and potential back taxes.
5. Transferring Ownership to an Individual Won't Reduce Capital Gains Tax
Foreign corporations sometimes attempt to transfer a U.S. real property interest (USRPI) to a foreign individual shareholder before selling, hoping to qualify for the lower individual capital gains tax rate (maximum 20%) instead of the corporate rate (21%). The IRS considers this a tax avoidance maneuver and may impose penalties.
The IRS has already flagged these strategies and closely monitors transactions where a foreign corporation transfers a USRPI before a sale. If the Foreign corporation sells the property itself, it is subject to the appropriate FIRPTA withholding and must file Forms 8288 and 8288-A with the IRS. Any attempt to manipulate the process will be identified and could result in tax liabilities, penalties, and audits.
Final Takeaway
The best approach is compliance. If you are a foreign seller of U.S. real estate, it's crucial to follow FIRPTA regulations and work with a qualified tax professional to ensure proper tax planning and reporting. Trying to avoid FIRPTA through Quitclaim Deeds, LLC formations, or ownership transfers will only lead to complications, potential penalties, and IRS scrutiny.
------------------------------
Kat Rodgers
Foreign Tax CPA, LLC
Cocoa Beach FL
+1 (321) 784-8329
------------------------------