Foreign Investment in Real Property Tax Act and Withholding Requirements

posted Jun 22, 2012, 1:30 PM by Candice Gidney   [ updated Oct 5, 2012, 12:01 PM ]

What Is FIRPTA?

The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) is a part of the US Income Tax Code which specifically imposes an income tax on the sale of US real property interests by Non-Resident Alien (“NRA”) individuals, partnerships and corporations.  When an NRA sells US real property they are required to report the sale by filing a US tax return for the year of the sale, and pay any income tax due on the capital gain (net profit), if any, as would any US resident.

For an NRA individual, Form 1040 NR, the US Nonresident Alien Income Tax Return, must be filed for the year of sale.  If there are multiple owners on title such as husband and wife, or a joint venture or partnership, then each individual will have to file a tax return.  For the year, all US source income must be reported.

To ensure collection of this tax from foreigners, the IRS requires a withholding tax to be collected.  The transferor (buyer) and/or transferor’s agent can be held liable for any tax not paid by the transferee (seller) should they fail to follow IRS guidelines.

FIRPTA Withholding: Attention Buyers

You may be impacted by FIRPTA whether you are the buyer or seller of US real estate.  FIRPTA requires any person acquiring real property to collect a withholding tax equal to ten percent (10%) of the gross sales price.  Additionally, if the seller determines that the actual tax owed is less than this amount, the parties can submit a request to the IRS (Form 8288) that only this lesser amount be withheld, IRS approval must be obtained prior to any closing.

Without IRS permission, the ten percent (10%) must be withheld regardless of the amount of tax due or the cash received.  These amounts must be paid to the IRS within twenty (20) days of the transfer, unless a withholding certificate application to reduce or eliminate withholding has been received. The application suspends the obligation to pay over the amount withheld until twenty (20) days after the IRS completes its determination.  Unlike other withholding taxes, FIRPTA withholding does not eliminate the seller’s obligation to file a US tax return reporting its gain.  The withholding agent must report the details of the transaction on an IRS form.

Buyers and sellers alike should retain both their initial purchase and subsequent closing documents as well receipts for any improvements or additions to the property.  Additionally, all tax returns filed relating to properties or other investments here in the United States should be maintained to determine the current profit/loss to calculate tax due.

Calculating Capital Gains Taxable Profit

Tax is assessed on capital gain which is the difference between the ‘11 tax basis ’12 and the sales price, adjusted for selling costs (commissions, excise taxes, escrow charges, etc.).  Under US regulations, the tax basis is the original purchase price, including acquisition costs and other legal expenses to perfect or defend title, plus any improvements (land, dwelling costs, outside of normal repairs) made to the property, including any utility service assessments.  Note that property taxes, mortgage interest, association dues are not included in the basis on non-income producing property.  If the property is, or was, a rental, then the basis will be adjusted for depreciation, and taxation may become more complex.

Additionally, if there is a capital gain on the sale of real property, then such gain will be subject to the Alternative Minimum Tax (“AMT”).

Other Rules

A buyer who purchases property as his primary residence for less than three hundred thousand dollars ($300,000) is not required to withhold funds.

There may be the opportunity for the seller to enter into a transaction where he would not recognize gain.

Depending on how property is titled there may be a death tax.

Disclaimer

This is a very brief and general discussion concerning sales of real property interests by citizens and residents of foreign countries.  Each transaction and individual’s tax situation is unique.  The US tax law is extremely complex and most of the general principles have numerous exceptions that are, in turn interpreted by a jungle of regulations, judicial discussions, and rulings by the tax authorities.  This article should not be relied upon as legal or tax advice.  Analysis for a specific investment should be done in concert with legal or tax counsel. 

There is different tax treatment for foreign and domestic corporations.  Please contact us if you have further questions, require a definitive answer to your dilemma or need additional assistance.

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