Firpta Substantial Presence Test

The Foreign Investment in Real Property Tax Act (FIRPTA) is a key U.S. tax law that affects individuals who sell real estate in the United States, particularly non-resident aliens and foreign persons. A critical issue in applying FIRPTA is determining whether a seller qualifies as a foreign person or a U.S. person for tax purposes. One of the important tools to make that determination is the Substantial Presence Test, administered by the Internal Revenue Service (IRS). While the substantial presence test is commonly used to determine resident alien status for income tax purposes, it also plays a vital role under FIRPTA in assessing withholding obligations and buyer responsibilities when U.S. real property is transferred. Understanding how the substantial presence test interacts with FIRPTA is essential for buyers, sellers, and advisors alike.

What FIRPTA Covers

FIRPTA was enacted to ensure the United States collects tax from foreign persons disposing of U.S. real property interests (USRPIs). Under FIRPTA, when a foreign person sells, exchanges, or otherwise disposes of a USRPI, the buyer (or transferee) is generally required to withhold a portion of the purchase price and remit it to the IRS. The law ensures that the gain on the disposition is effectively taxed. A key element in applying these rules is identifying whether the seller is a foreign person or a U.S. person. If the seller is a U.S. person, FIRPTA withholding does not apply; if they are a foreign person, withholding generally must occur.

The Substantial Presence Test Explained

The substantial presence test is a formula used by the IRS to determine whether a non-U.S. citizen or non-permanent resident foreign national file as a resident alien for tax purposes. The test looks at the number of days a person has been physically present in the United States over the current year and the two preceding years. Specifically, the test requires

• Being physically present in the U.S. for at least 31 days during the current calendar year, and
• A total of 183 days using the following formula for the three-year period that includes the current year and the two years before
  (All days present in current year) + (1/3 of days present in the first preceding year) + (1/6 of days present in the second preceding year).

For example, if a non-resident alien is present 120 days in the current year, 120 days in the previous year, and 120 days in the year before that, the calculation would be 120 + (120 Ã 1/3) + (120 Ã 1/6) = 120 + 40 + 20 = 180 days. Because that is less than 183 days, that individual does not satisfy the substantial presence test in that year. contentReference[oaicite3]

Exceptions and Special Rules

Not all days spent in the United States count toward the substantial presence test. Some exceptions include

• Days the individual commutes to work in the U.S. from Canada or Mexico.
• Days in transit in the U.S. for less than 24 hours between two places outside the U.S.
• Days present as an exempt individual, such as certain student (F-1, J-1, M-1, Q-1/2) or teacher/trainee (J-1, Q-1/2) visa holders who meet criteria. contentReference[oaicite4]

Additionally, an individual who meets the substantial presence test may still avoid being treated as a resident for tax purposes if they satisfy the closer connection exception by filing Form 8840. contentReference[oaicite5]

How the Substantial Presence Test Integrates with FIRPTA

Under FIRPTA, it is essential to know if the seller is a foreign person (for FIRPTA purposes) or a U.S. person. One of the determining factors is whether the individual is a U.S. resident for tax purposes. If the seller qualifies as a U.S. resident alien by the green card test or by meeting the substantial presence test they are considered a U.S. person and FIRPTA withholding may not apply. Conversely, if the individual does not satisfy the substantial presence test (and does not have a green card), they may be treated as a foreign person subject to FIRPTA rules. contentReference[oaicite6]

This means that buyers of U.S. real estate must exercise due diligence to determine whether the seller is a foreign person. The buyer acts as the withholding agent under FIRPTA and may be held liable if withholding is required but not performed. If the seller meets the substantial presence test and is therefore a U.S. person, the buyer may rely on the seller’s certification of non-foreign status instead of withholding. contentReference[oaicite7]

Practical Examples and Application

Consider a non-citizen seller who has been physically present in the United States for significant periods over the past two years and is selling U.S. real property. The buyer must determine whether the seller passes the substantial presence test. For instance

• In 2024 the seller was present 210 days.
• In 2023 the seller was present 180 days.
• In 2022 the seller was present 150 days.

Using the calculation 210 days (2024) + (180 ÷ 3 = 60) + (150 ÷ 6 = 25) = 295 total days. Because this exceeds 183 days, the seller meets the substantial presence test and qualifies as a U.S. tax resident. Consequently, the transaction likely falls outside FIRPTA withholding requirement since the seller is not a foreign person under FIRPTA. contentReference[oaicite8]

On the other hand, if a seller has only 90 days in 2024, 40 days in 2023, and 30 days in 2022, the sum would be 90 + (40 ÷ 3 ≈ 13) + (30 ÷ 6 = 5) = 108 days, which is below 183. The seller fails the substantial presence test and may be considered a foreign person under FIRPTA, triggering withholding obligations for the buyer.

Key Considerations for Buyers and Sellers

For real estate transactions involving foreign sellers or non-resident individuals, both parties must be aware of how the substantial presence test and FIRPTA interact

Seller’s Responsibilities

• Determine and document whether they meet the substantial presence test or hold a green card.
• If they are a U.S. person, provide a non-foreign status certification to the buyer.
• Consult with a tax advisor if their presence in the U.S. is borderline or if they have used visas that may complicate counting days.

Buyer’s Responsibilities

• Ascertain the seller’s status early, including whether the substantial presence test is met.
• If the seller is a foreign person, withhold the required percentage of the transaction (commonly 15 % of the sales price) unless an exception applies. contentReference[oaicite9]
• File the appropriate forms with the IRS, such as Form 8288 and 8288-A, if withholding occurs.

Complexities and Important Exceptions

The interaction of the substantial presence test, visa status, and FIRPTA raises complexities that warrant careful attention

• Some individuals may meet the substantial presence test but still claim they have a closer connection to a foreign country and avoid U.S. tax resident status using Form 8840 or Form 8843. contentReference[oaicite10]
• The type of visa the individual holds can affect whether days count toward the test. For example, students and teachers under certain visas may be exempt from counting days. contentReference[oaicite11]
• Even if the seller is a U.S. person for income tax purposes, other FIRPTA rules and exceptions must be reviewed, including withholding exceptions when the property is sold for $300,000 or less for use as a residence. contentReference[oaicite12]

Because of these nuances, both buyers and sellers are strongly advised to consult tax professionals familiar with U.S. international tax and real estate transactions to avoid unexpected liability or compliance issues.

The substantial presence test is a pivotal tool in determining U.S. tax residency status for non-citizens and plays a significant role in applying the FIRPTA rules to real estate transactions. Whether the seller is classified as a foreign person or a U.S. person can change the withholding obligations under FIRPTA and influence the entire closing process. By understanding how to calculate the days of presence, recognize exceptions, and apply the test in the context of U.S. property dispositions, both buyers and sellers can navigate FIRPTA obligations more confidently. Given the complexity of residency rules, real estate professionals, legal advisors, and investors should always assess the substantial presence test as part of their due diligence when dealing with transactions involving foreign individuals and U.S. real property.