The Foreign Investment in Real Property Tax Act is the Federal law governing the taxation & withholding by foreign persons selling U.S. real estate. Real estate sales associates, brokers, and attorneys should advise foreign buyers of the Foreign Investment in Real Property Tax Act (FIRPTA) prior to closing. When foreign buyers are aware of the tax upon purchase, they are less likely to be surprised about the tax upon selling.
Under the old FIRPTA Rules, the buyer was required to withhold 10% of the gross sales price, although certain exceptions apply.
Under the new FIRPTA, effective in February 2016, the withholding was increased to 15% of the gross sales price. In addition, there is a distinction for Buyers using the property as a “Personal Residence” with varying treatment at different sales prices. (Certain exceptions apply here as well.)
This withholding is remitted to the Internal Revenue Service as a deposit on the income tax liability generated from the sale. When the actual income tax resulting from the sale is reported on the seller’s tax return, the withholding will be applied and the seller will either remit a sum to satisfy the outstanding balance or will receive a refund of any excessive withholding.
An exception to the withholding requirement applies to sales of real property where the sales price does not exceed $300,000 if the purchaser intends to make personal use of the property as a residence for at least fifty percent of the time the property is in use, for at least two consecutive 12-month periods following the date of purchase. This exception is not available to business entities, trusts, or the sale of vacant land.
A “foreign person” is defined under FIRPTA as a nonresident alien individual, foreign corporation, partnership, trust or foreign estate.
