If you’re a foreign investor looking to buy or sell real estate in the United States, it’s important to understand the Foreign Investment in Real Property Tax Act (FIRPTA). Enacted in 1980, FIRPTA is a federal law that taxes foreign investors on dispositions of US real property interests. In this article, we’ll go over the basics of FIRPTA, its purpose, and how it affects foreign investors in the US real estate market.

What is FIRPTA? FIRPTA requires that a withholding tax of 10% of the gross sales price be withheld at closing when a foreign person sells a US real property interest. This includes not only the sale of a house or apartment, but also commercial properties such as office buildings, shopping centers, and even raw land. The withholding tax is paid to the Internal Revenue Service (IRS) and can be credited against the foreign person’s US tax liability.

Purpose of FIRPTA:

The purpose of FIRPTA is to ensure that foreign investors are subject to US tax laws on their US real estate transactions. It also helps to ensure that taxes on the sale of US real estate are collected in a timely manner. By requiring a withholding tax at closing, the IRS can ensure that taxes are paid on the sale even if the foreign person does not file a US tax return.

Who is affected by FIRPTA?

Foreign individuals or entities who own or sell US real property interests are affected by FIRPTA. US buyers of such properties are also affected as they are responsible for withholding and remitting the tax to the IRS. US sellers of such properties may also be subject to FIRPTA rules if they are foreign person and the sale is subject to FIRPTA rules.

Exceptions to FIRPTA There are certain exemptions and exceptions to FIRPTA, such as:

• The property is used as the foreign person’s personal residence.
• The sales price is $300,000 or less.
• The property is sold to a corporation.

It’s important to note that these exceptions have certain conditions and requirements that must be met in order to qualify. For example, for the personal residence exception to apply, the foreign person must have lived in the property for at least two out of the last five years before the sale.

In addition, certain transactions may qualify for reduced withholding rates. For example, if the foreign person provides a certification to the buyer or the closing agent that he or she is not a US person, the withholding rate may be reduced to 5% of the sales price.

Entity and Corporate Structures:

When it comes to structuring an entity to hold US real property interests, there are several options available to foreign investors. However, it’s important to note that the choice of entity can have a significant impact on the foreign investor’s US tax liability and compliance obligations under FIRPTA. Here are a few common entity structures used by foreign investors:

1. Foreign Corporation: A foreign corporation can hold US real property interests, but it will be subject to US corporate income tax on any income from the property. In addition, if the foreign corporation sells the property, it will be subject to FIRPTA withholding at the rate of 10% of the gross sales price.
2. Foreign Limited Partnership (FLP): A FLP is a partnership that is treated as a pass-through entity for US tax purposes, meaning that the partners are taxed on their share of the partnership’s income. This can be a favorable structure for foreign investors, as it allows them to avoid US corporate income tax on the property. However, if a foreign partner disposes of its partnership interest, it will be subject to FIRPTA withholding at the rate of 10% of the sales price.
3. Foreign Limited Liability Company (FLLC): An FLLC is similar to a FLP, in that it is treated as a pass-through entity for US tax purposes. It can be a favorable structure for foreign investors, as it allows them to avoid US corporate income tax on the property. However, like FLP, if a foreign member disposes of its membership interest, it will be subject to FIRPTA withholding at the rate of 10% of the sales price.
4. Foreign Trust: A foreign trust can also be used to hold US real property interests, but it can be subject to complex US tax rules. In addition, if a foreign beneficiary disposes of its beneficial interest in the trust, it will be subject to FIRPTA withholding at the rate of 10% of the sales price.

It’s important to note that these are just a few of the entity structures that foreign investors can use to hold US real property interests. Each entity structure has its own set of pros and cons, and the best choice will depend on the foreign investor’s specific circumstances and goals. It is always recommended to seek the advice of a tax professional when choosing an entity structure.

Here are some entity selection choices that can work to eliminate FIRPTA

Conclusion:

FIRPTA is a federal law that affects foreign individuals or entities who own or sell US real property interests. Its purpose is to ensure that foreign investors are subject to US tax laws on their US real estate transactions. It is important for foreign investors, US buyers and US sellers of such properties to understand and comply with FIRPTA regulations to avoid penalties. It is always advisable to seek the advice of a tax professional for specific situations.

It’s important to note that this is an overview of the FIRPTA subject and not intended as tax advice. If you’re a foreign investor looking to buy or sell real estate in the United States, it’s always a good idea to consult with a tax professional to ensure that you understand and comply with all relevant laws and regulations.

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