Foreign investment in the US real estate market has become increasingly popular over the years. However, a little-known tax law could impact foreign investors looking to sell their US real estate holdings. This tax law is called FIRPTA and stands for Foreign Investment in Real Property Tax Act. In this blog post, we will explore what FIRPTA is, how it works, and whether foreign investors can avoid it.
What is FIRPTA?
FIRPTA is a tax law that requires foreign persons to pay US income tax on the gains they make from the sale of US real property interests. Under FIRPTA, a US real property interest includes any interest, other than solely as a creditor, in real property located in the United States or the US Virgin Islands, as well as any interest in a domestic corporation that is a US real property holding corporation (USRPHC).
How does FIRPTA work?
FIRPTA requires the buyer of a US real property interest from a foreign person to withhold 15% of the gross sales price and remit it to the IRS. The withheld amount serves as a prepayment of the foreign seller’s US income tax liability on the gain realized from the sale. If the withholding amount exceeds the foreign seller’s actual US income tax liability, the seller can claim a refund of the excess amount.
Are there any exceptions to FIRPTA withholding?
Yes, there are certain exceptions to FIRPTA withholding. For example, if the sales price is $300,000 or less and the buyer intends to use the property as their primary residence, then no withholding is required. Similarly, if the buyer obtains a withholding certificate from the IRS stating that the withholding is unnecessary, then no withholding is required. Other exceptions include sales by foreign governments and sales by certain tax-exempt organizations.
Can foreign investors avoid FIRPTA when they sell?
It is possible for foreign investors to avoid FIRPTA when they sell their US real estate holdings. One way to avoid FIRPTA is to structure the sale as a sale of the stock of the USRPHC rather than as a sale of the underlying real estate. In this scenario, FIRPTA does not apply because the sale of the stock is not considered a sale of US real property interests. However, this strategy may not be practical in all situations.
In conclusion, FIRPTA is an important tax law that foreign investors in US real estate should be aware of. While it may seem like an additional burden, understanding and complying with FIRPTA can help foreign investors avoid unnecessary tax penalties and ensure a smoother real estate transaction process.
Resources:
https://www.irs.gov/individuals/international-taxpayers/firpta-withholding
https://www.irs.gov/individuals/international-taxpayers/exceptions-from-firpta-withholding
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