The Foreign Investment in Real Property Tax Act (FIRPTA)

Overview

Passed in 1980, FIRPTA was designed to impose a tax on capital gains earned by foreign persons from their sale of U.S. real property in the United States or U.S. Virgin Islands.

Authorizes the IRS to apply a withholding income tax on non-resident aliens and foreign corporations with sales of U.S. Real Property Interests (USRPI).

• A real property interest includes sales of real property, as well as shares in certain U.S. corporations that primarily hold and sell real property in the U.S.

• The law broadly defines USRPIs to include all direct and indirect rights to appreciation in real estate, this includes an interest in any U.S. domestic corporation that holds U.S. real property as its main assets.

• Examples:
  • Bare land
  • Residential land and buildings
  • Condominium units
  • Commercial land and buildings
  • Mine, well and other natural deposits
  • Farm land and certain farm machinery
  

• When a person or corporation purchases a USRPI from non-resident aliens or foreign corporations, they are required to withhold 10% of the amount realized (gross sale price).

• An exception to this is if the taxes due from the sale would be less than the standard 10% tax. The IRS must be petitioned to meet this exception.


• The 10% withholding tax imposed on the foreign seller of a USRPI is not the amount of tax actually due. It is merely an advance payment toward the foreign seller's U.S. income tax obligation arising from the sale of the property.


• The foreign seller must file a U.S. income tax return for the year of the sale by the applicable filing deadline. Such return will show the amount of gain derived from the disposition of the USRPI and the amount of U.S. income tax due on the gain


• The amount of the foreign seller's U.S. tax obligation is determined by crediting the withholding tax against the amount of income tax due as shown on the return.

Exceptions & Exemptions

A common exception (though not uniform throughout the U.S.) to FIRPTA withholding is that the person or corporation purchasing the property is not required to withhold tax when the purchaser purchases real estate for their own home and the purchase price is $300,000 or less.

Interest in real property that is solely a creditor’s interest, including a mortgage interest or other security interest.

“Like-Kind Exchanges”. If a seller receives a Like-Kind property in exchange, they may avoid the gain recognition and will not be affected by FIRPTA. However, no other property (ie- cash) may be received as part of the transaction or the entire transaction is disqualified and all gain is recognized.

• Note: Real property within the United States CANNOT be exchanged for real property outside the United States and still qualify for the exemption.

The amount the seller realizes on the transfer of a U.S. real property interest is zero. This would be the case when a property is gifted.

FIRPTA does NOT apply to a 5% or less interest in a publicly traded corporation, an interest in a domestically-controlled real estate investment trust (REIT), or an interest in a U.S. company that has disposed of all its USRPIs in a taxable sale.

• However, gains realized by partnerships, trusts, estates and REITS on the sale of USRPI is a 35% withholding on the net gain.