What is FIRPTA?
It's the Foreign Investment in Real Property Tax Act of 1980. It is a tax law that applies to foreign persons who are disposing of U.S. property.
Who does FIRPTA affect?
FIRPTA affects all non-resident aliens and foreign companies not considered to be American corporations. From a taxation (tax return) standpoint, when a person who doesn't live in the United States, or when a foreign corporation sells a property in the United States, they shall be subject to FIRPTA provisions.
How does it affect buyers and sellers?
Since February 16th 2016, at the time of closing, buyers are required to withhold 15% of the sales price if the buyer will not reside in the property.
If buyer will reside in the property the withholding tax applicable will vary and will be determined according to the sales price, as follows:
15% of the sales price in transactions valued above $1,000,000.
10% of the sales price in transactions valued between $300,000 and up to $1,000,000
If sales price is below $300,000 there is no withholding tax
For example, a foreign investor sells a property for $350,000 (USD) and the buyer will reside in the property the closing agent of the transaction (the company or lawyer that processes the title deed) will retain $35,000 (USD) in a special escrow account, until the foreign investor presents their federal income tax return before the due date on the next calendar year following the closing of the sale.
What is the difference between “withholding tax” and “tax?”
Withholding tax is the mechanism whereby the IRS forces the foreign individual or company to submit their tax return to determine if a profit or a loss resulted from the transaction.
Once the tax return is submitted and the IRS determines the amount to be charged as tax, the difference between the withholding tax and the tax is returned to the seller.
Can this withholding be avoided?
It's very important to properly plan this out to avoid negative surprises at closing.
Buying in your own name or through a company is one of the most important elements in the application of FIRPTA. However, the type of legal structure and the internal makeup could make a difference. On the other hand, FIRPTA is only one of the factors that should be taken into consideration, so it's extremely important you know the advantages and disadvantages of the different purchasing structures (LLC, S-Corp, Trust, Corporation, etc.).
How does it affect the buyer?
As a buyer, you should make sure the withholding tax is implemented in case the seller is a non-resident alien or a foreign company not considered a U.S. corporation. If you don't make sure it's implemented, you may be responsible for paying the taxes.
On the other hand, as a buyer, it's important to make sure you create the most effective purchasing structure to deal with this withholding tax for a future sale.
The provisions of FIRPTA are complicated and require the expertise of a real estate lawyer or public accountant. They can fill out the proper forms and evaluate the possible implications. The information provided herein should not be considered a source of legal or financial advice. Please contact a professional in your area to receive information and guidance that applies to your individual situation.