FIRPTA stands for the Foreign Investment in Real Property Tax Act 1980. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. It requires a buyer of real estate to withhold 10% of the gross sales price (subject to certain exceptions and exclusions) and remit the funds to the Internal Revenue Service if the seller is a “foreign person.” This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc.
A foreign person is defined as a nonresident alien individual, a foreign corporation, partnership, trust, estate or other entity. The tax itself is levied on the gross amount realized by the seller with no allowance or deduction for selling expenses. However, many foreign investors qualify for an exception.
The withholding is done during the escrow process and the procedure can vary depending on the structure. In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold the tax, you could be held liable for the tax.
Penalties for failure to comply can be substantial. We can help you understand FIRPTA requirements and to determine if you qualify for an exclusion under the law.
If a nonresident alien sells a U.S. real property interest, the purchaser is generally required to withhold U.S. taxes at the time of closing (IRC §897). The withholding amount is normally 10% the total amount received by the seller in the form of cash, fair market value of other property transferred and/or assumption of the seller’s liabilities. The amount can be reduced or eliminated in the following circumstances:
- The sales price is not more than $300,000 and the purchaser has definite plans to reside in the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer.
- The alien provides a certification stating, under penalties of perjury, that he or she is not a foreign person.
- The alien provides a withholding certificate showing that a lesser amount should be withheld.
- The alien provides a written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code (for example, the house qualified as the alien’s principal residence for two of the last five years).
- The amount the alien realizes on the transfer is zero.
- The property is acquired by the U.S. government, state, possession, political subdivision or the District of Columbia.
- Certain other provisions related to disposition of corporate or partnership interests or the lapse of an option.