FIRPTA: What it is and Why it Matters

FIRPTA (Foreign Investment in Real Property Tax Act) Withholding is the Withholding of Tax on Dispositions of United States Real Property Interests. FIRPTA applies to foreign people who intend to sell a real property located in the U.S. Here’s everything you need to know about FIRPTA, as a realtor, seller, or buyer.

FIRPTA for Realtors

According to the National Association of Realtors (NAR), :

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980, initially as a response by Congress to concerns about increasing foreign ownership of farmland in the United States. The major purpose of FIRPTA was to establish equity of tax treatment in U.S. real property between foreign and domestic investors. Now, almost 40 years later, bills introduced in both the U.S. Senate and House of Representatives have attracted a great deal of support from commercial real estate stakeholders in the country, as well as an unusually high number of bipartisan cosponsors in Congress.

FIRPTA for Sellers

According to the IRS:

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.

A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferee) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition (special rules for foreign corporations).

In most cases, the transferee/buyer is the withholding agent. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.

FIRPTA for Buyers

In most cases, someone who buys a real property in the U.S. is liable for deducting and withholding 15% of the amount realized by the seller. This withheld amount, however, should never exceed the seller’s determined maximum tax liability. To ensure this, the IRS may determine the seller’s maximum tax liability first. 

Obtaining a withholding certificate is also a great way to reduce or eliminate required withholdings. As it stands now, both sellers and buyers can apply for withholding certificates from the IRS. If a withholding certificate is obtained before the sale, it could enable the buyer to withhold a decreased amount or avoid withholding entirely. 

Until the withholding certificate is issued, the buyer must still withhold their required 15% of the total sales price. The pending application, however, suspends the obligation to pay the said amount until 20 days after the IRS has issued its termination. If the earlier withholding amount exceeds what the IRS specifies, the seller can apply for a refund. 

Don’t wade through FIRPTA alone. Let our firm help. Contact us today to learn more about our services.

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