FIRPTA is a U.S. tax law that can be quite a headache for foreign investors and companies, because it is often misunderstood. Unfortunately, improperly addressing FIRPTA issues can leave you open to serious liabilities and prosecution by the IRS. A Priori FIRPTA lawyer can help you decipher whether you are subject to FIRPTA and help you mitigate its impact.
If a U.S. citizen sells assets, that profit is taxed as regular income tax. The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was created to ensure that foreign citizens would also be subject to taxes on such profit.
How It Works
Under FIRTPA, dispositions of all U.S. real property interests by foreign persons are made subject to income tax, unlike other capital gains by non-U.S. persons. This is paid to the IRS through regular IRS income tax filings at regular tax rates for the type of taxpayer on the amount of gain recognized.
Key Terms Unique to FIRPTA
Definitions of key terms in FIRPTA are mostly unique to this act. The following are some key terms you must understand in order to understand how and when FIRPTA applies:
- U.S. Real Property Interest. This includes actual property, such as land, personal property items, undeveloped natural resources and improvements on property. It also includes assets less commonly thought of as property, including shares, interest in a corporation, interest in a partnership and any other ownership rights to a U.S. business or real estate.
- Foreign Person. A foreign person under FIRPTA is defined as a nonresident alien individual, a foreign corporation, a foreign partnership, a foreign trust or foreign estate. This does not apply to foreign persons legally residing in the United States.
- Disposition: Disposal for profit of a U.S. real property interest by sale, exchange, gift or any other transfer. This includes distributions to shareholders of a corporation, partners of a partnership and beneficiaries of a trust or estate.
Withholding and Exemptions
As a part of this act, FIRPTA requires buyers to withhold 10 percent of the sales price by filing Form 8288 with the IRS and turning over those funds to their account to ensure that FIRPTA taxes are paid. If proper withholding is not carried out by the buyer, they can be held responsible for the amount not paid. There are four exemptions that allow you to get around withholding provisions of FIRPTA:
- the purchase is to be used as a personal residence and is worth less than $300,000;
- the buyer receives a statement from the seller that the seller is a not a foreign person;
- when acquiring shares of a publicly traded corporation; and
- when buying interest in a non-publicly traded domestic corporation when the corporation provides the required affidavit.
If you sell a real property interest as a foreign person in the U.S., it is almost impossible to get around FIRPTA. There are, however, actions you can take to mitigate the impact of FIRPTA on your capital gains. You can apply to the IRS to reduce the amount withheld to just 10 percent of tax estimated to be due. You can also purchase and dispose assets using a domestic corporation, although you will still be required to file disclosures of the makeup of the company as foreign.
It’s important to note that these tactics only change the taxation process; they do not eliminate your tax burden altogether. If you want to know which options may best mitigate the impact of FIRPTA for you, discuss your unique situation with an experienced FIRPTA attorney and your CPA.
The legal costs related to FIRPTA concerns and other tax-related issues can vary significantly based on a variety of factors. Priori lawyers can guide you through the process from approximately $150 to $375 per hour. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and free price quote from one of our lawyers.
If I sell my personal home in the U.S., does FIRPTA apply?
FIRPTA only applies to a personal home if you are not a resident of the U.S. Either way, though, you will be subject to the same tax, either through regular income taxes or under FIRPTA.
How do withholding provisions apply to non-foreign buyers?
For withholding provisions of FIRPTA, the nationality of the buyer does not matter—only the seller. If you buy real estate from a foreign person, you must withhold the required percentage or you open yourself up to liability— even if you are a U.S. citizen.