Summary

Discover how FIRPTA affects your U.S. real estate investments. Learn about withholding, strategies to minimize impacts and responsibilities as a foreign investor.

FIRPTA: What every foreign investor should know about U.S. real estate taxes.

If you are a foreign investor in the U.S. real estate market, you must be aware of the Foreign Investment in Real Property Tax Act (FIRPTA). This tax regulation can have a significant impact on your real estate transactions and your pocketbook.

What is FIRPTA and who does it affect?

FIRPTA is a law that applies to non-resident alien individuals and foreign companies not considered domestic corporations that sell property in the United States. Its main objective is to ensure that foreign investors pay the appropriate taxes on the sale of real estate on U.S. soil.

Financial Impact: How much is withheld?

When you sell property as a nonresident alien, you will be subject to withholding on the sales price:

  • 15% for transactions over $1,000,000.
  • 10% for transactions under $1,000,000.

For example, if you sell a property for $350,000, the closing agent will hold $35,000 in an “escrow” account until you file your tax return.

Strategies to minimize the impact of FIRPTA

  • Request a reduced withholding certificate: Use IRS Form 8288-B 90-120 days in advance of closing to potentially reduce the withholding percentage.
  • Structure the sale into multiple transactions: Consider splitting the sale into transactions under $300,000 to possibly qualify for exemptions.
  • Use a U.S. corporation or trust: These entities are not subject to FIRPTA withholding.
  • Offer financing to the buyer: Recurring payments may qualify for a reduced withholding rate.

Buyer’s Responsibilities

As a buyer, you also have obligations under FIRPTA. You must ensure withholding is withheld if the seller is a nonresident alien or foreign company. Otherwise, you may be liable to pay that withholding.

Recovering the amount withheld

To recover the amount withheld, you will need to:

  • Hire a real estate attorney or CPA.
  • Obtain an Individual Taxpayer Identification Number (ITIN).
  • File the appropriate applications and returns with the IRS.
  • This process can take up to approximately 90 days.

Conclusion

FIRPTA is a complex law that requires attention and careful planning. It is essential to have professional advice to navigate its provisions and avoid unpleasant surprises at the closing of your real estate transactions.

Remember, the information provided here is general and is not a substitute for personalized legal or accounting advice. Always consult with a qualified professional before making important decisions about your U.S. real estate investments.

Sources

FIRPTA withholding

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