by Gernot Taschler 
The Foreign Investment in Real Property Tax Act of 1980, commonly known as FIRPTA, is a tax legislation that impacts foreign individuals and companies who wish to sell their property in the United States.
Who does FIRPTA apply to?
FIRPTA applies to non-resident aliens and foreign companies that are not considered American corporations. From a tax perspective, when a person who does not reside in the United States or when a foreign corporation sells a property within the country, FIRPTA provisions come into play.
How does it impact buyers and sellers?
During the closing process, buyers are required to withhold a portion of the sales price. Transactions valued below $1,000,000 necessitate a withholding of 10%, while transactions valued above $1,000,000 require a withholding of 15%. For example, if a foreign investor sells a property for $350,000 (USD), the closing agent handling the transaction will retain $35,000 (USD) in a special escrow account until the foreign investor submits their federal income tax return in January of the following year.
What distinguishes “withholding tax” from “tax”?
The withholding tax is a means by which the Internal Revenue Service (IRS) ensures that the foreign individual or company submits their tax return to determine whether the transaction resulted in a profit or loss.
Once the tax return is filed and the IRS determines the tax amount owed, any difference between the withholding tax and the actual tax liability is refunded to the seller.
Can this withholding be avoided?
Proper planning is crucial to avoid any unpleasant surprises during the closing process.
Choosing to purchase a property under your own name or through a company significantly influences the application of FIRPTA. However, the specific legal structure and internal composition can make a difference. Additionally, FIRPTA is just one factor among many that should be considered, making it essential to understand the advantages and disadvantages of various purchasing structures, such as LLCs, S-Corps, Trusts, and Corporations.
How does it impact the buyer?
As a buyer, it is essential to ensure that the withholding tax is implemented when the seller is a non-resident alien or a foreign company not classified as a U.S. corporation. Failure to ensure its implementation could leave you responsible for paying the taxes.
Moreover, as a buyer, it is crucial to establish an effective purchasing structure that can effectively address the withholding tax for any potential future sale.
DISCLAIMER: FIRPTA provisions are complex and require the expertise of a real estate lawyer or public accountant. These professionals can assist with completing the necessary forms and evaluating potential implications. The information provided here should not be considered as legal or financial advice. Please consult with a qualified professional in your area to obtain advice and guidance specific to your individual circumstances.
