The Foreign Investment in Real Property Tax Act of 1980
The Foreign Investment in Real Property Tax Act of 1980, FIRPTA, is a United States tax law that often presents difficult challenges for foreign companies and/or investors seeking to dispose of their real property interests within the States. Due to the complex intricacies found within FIRPTA provisions, foreign investors often find themselves in a legal bind when trying to navigate the muddled waters of the Act. Failing to comply with FIRPTA obligations can expose foreign property owners to serious financial liabilities and even prosecution by the Internal Revenue Service.
At Antonoplos & Associates, our experienced team of FIRPTA attorneys is ready to assist you in navigating your obligations under FIRPTA and help mitigate its financial impact on your real property transaction.
In the United States, all persons – both foreign and domestic – are required to pay income tax on dispositions of their real property interests. When a U.S. citizen sells their real property asset, the profit from that transaction is taxed as regular income tax. This, however, is not how the law operates with respect to foreign individuals. Unlike domestic citizens, foreigners are taxed only on certain income items, which excludes most capital gains. FIRPTA, therefore, was created to ensure that foreign individuals do not escape tax liability with respect to profit from real property sales transactions.
How FIRPTA Works
Under FIRPTA, dispositions of U.S. real property by foreign persons are subject to income tax withholding. This tax is paid to the IRS through regular income tax filings at the regular tax rates for the type of taxpayer on the amount of gain recognized. For a more detailed explanation of your withholding obligations under FIRPTA, visit out FIRPTA Withholding page.
When the seller of a real property interest is not a resident of the United States, FIRPTA requires that 15%* of the sales price be withheld by the transferee. The 15%* withholding rate may be reduced upon the issuance of an IRS certification stating that a reduced withholding rate is permitted.
At Antonoplos & Associates, our FIRPTA attorneys have extensive experience dealing with FIRPTA issues and have learned to navigate this complex IRS process with both dexterity and efficiency. If you are a non-U.S. resident considering selling your real property interest, please allow the competent FIRPTA attorneys at Antonoplos & Associates guide you through this process.
Key Terms Unique to FIRPTA
Many terms found throughout the FIRPTA provisions are wholly unique to this Act. Below are just a few key terms that are necessary to understand in order to have an accurate understanding of the Act itself.
- U.S. Real Property Interest. A “U.S. real property interest” includes actual property (such as land), improvements on property, personal property items, and undeveloped natural resources. This term also encompasses assets that are less commonly through of as property, such as shares in stock; interest in a corporation; interest in a partnership; and any other ownership rights to a U.S. business or real estate.
- Foreign Person. Under FIRPTA, a “foreign person” is defined as a nonresident alien individual, a foreign corporation, a foreign partnership, a foreign trust or foreign estate. Foreign person does not include foreign persons legally residing in the United States.
- Disposition. FIRPTA defines a “disposition” as a disposal for profit of a U.S. real property interest by sale, exchange, gift or any other transfer. A disposition includes distributions to shareholders of a corporation, partners of a partnership and beneficiaries of a trust or estate.
FIRPTA Withholding and Exemptions
FIRPTA requires buyers of real property interests to withhold 15%* of the sales price by filing a Form 8288 with the IRS and turning over the withheld funds to ensure that FIRPTA taxes are paid. Should the buyer of a real property interest fail to carry out their withholding obligation, that individual/entity may be held responsible for the outstanding tax burden. You can learn more about the IRS process for paying your FIRPTA tax by visiting our Reporting and Paying Tax on U.S. Real Property Interests page.
There are a number of important exemptions that allow buyers to escape their withholding responsibilities under FIRPTA. Four of the key exemptions include:
- The purchase will be used as a personal residence and is valued at less than $300,000;
- The seller provides the buyer with a statement claiming that they are not a foreign person;
- When the buyer is acquiring shares of a publicly traded corporation; and
- When the buyer is purchasing interest in a non-publicly traded domestic corporation and the corporation provides the necessary affidavit.
Mitigating Your Tax Burden Under FIRPTA
Though it is often impossible for foreigners selling their real property interests in the United States to circumvent their FIRPTA obligations, there are actions individuals can take to mitigate the impact that FIRPTA will have on their capital gains. Specifically, individuals may apply for and IRS Withholding Certificate if they believe they qualify for a reduced withholding amount. To learn more about IRS Withholding Certificates and how to apply for them, click here.
It is important to understand that these tactics typically only change the taxation process, and often do not eliminate the tax burden completely. The attorneys at Antonoplos & Associates stand ready to discuss your unique FIRPTA situation and will work with you to develop a plan best mitigates your tax burden and keeps the most money in your pocket.
*The withholding rate increased from 10% to 15% for dispositions made after February 17, 2016.
For more information about FIRPTA compliance and how Antonoplos & Associates can assist you with FIRPTA please contact us Antonoplos & Associates at 202-803-5676 to speak with one of our FIRPTA attorneys regarding your transaction.