The Foreign Investment in Real Property Tax Act (FIRPTA) is a United States tax law passed in 1980. FIRPTA aims to ensure that foreign persons and entities selling U.S. real property interests pay taxes on any gains realized from the sale. The law applies to non-resident aliens, foreign corporations, foreign partnerships, foreign trusts, and foreign estates.
Under FIRPTA, when a foreign seller is involved in a U.S. real property transaction, the buyer is typically required to withhold a percentage (usually 15%) of the gross sales price. This amount is then submitted to the Internal Revenue Service (IRS) as a prepayment of the taxes the foreign seller may owe on the capital gains from the sale. The withheld amount is credited against the seller’s final tax liability when they file a U.S. income tax return.
It’s important to note that FIRPTA withholding is not an additional tax; it is a mechanism to ensure foreign sellers pay their due taxes on the gains realized from the sale of U.S. real property interests.
There are some exceptions and reduced withholding rates available under certain circumstances, such as when the buyer plans to use the property as a personal residence and the sales price does not exceed a specified threshold. In these cases, the buyer may be required to withhold a smaller percentage or may be exempt from withholding altogether.
Both buyers and sellers involved in transactions subject to FIRPTA should consult with a qualified tax professional or real estate attorney to ensure compliance with the law and understand their obligations and potential tax liabilities.