Understanding FIRPTA: A Comprehensive Guide for Foreign Sellers and U.S. Buyers

The U.S. real estate market has long been an attractive destination for foreign investors. However, selling U.S. property as a foreign person involves specific tax obligations under the Foreign Investment in Real Property Tax Act (FIRPTA). This guide aims to clarify FIRPTA's key aspects for both foreign sellers and U.S. buyers.

What Is FIRPTA?

Enacted in 1980, FIRPTA ensures that foreign persons pay U.S. income tax on gains from selling U.S. real property interests (USRPIs). Before FIRPTA, foreign sellers were often exempt from such taxes, leading to concerns about tax equity between domestic and foreign investors. FIRPTA addresses this by imposing a withholding tax on the disposition of USRPIs by foreign persons. (Wikipedia)

Who Is Affected?

• FIRPTA applies when a "foreign person" sells a USRPI. A foreign person includes:

• Nonresident alien individuals

• Foreign corporations not electing to be treated as U.S. corporations

• Foreign partnerships, trusts, and estates()

• U.S. persons—such as U.S. citizens, resident aliens, and domestic entities—are not subject to FIRPTA withholding .

What Qualifies as a U.S. Real Property Interest (USRPI)?

A USRPI includes:()

• Land, buildings, and other improvements

• Certain personal property associated with real property use

• Interests in domestic corporations that are U.S. real property holding corporations

• The IRS provides detailed definitions and examples of USRPIs .

Buyer’s Withholding Obligations

Under FIRPTA, the buyer must withhold 15% of the gross sales price and remit it to the IRS within 20 days of the transaction. This withholding ensures the IRS can collect any tax owed by the foreign seller. (IRS)

Exceptions and Reduced Withholding

Certain situations may exempt the buyer from withholding or allow for reduced withholding:

Personal Residence Exemption: If the property is acquired for use as a personal residence and the sales price is $300,000 or less, withholding may not be required. (IRS)

IRS Withholding Certificate: The seller can apply for a withholding certificate from the IRS to reduce or eliminate withholding if the actual tax liability is less than 15% of the sales price. This application must be submitted before the sale closes. (IRS) 

Importance of Professional Guidance

FIRPTA regulations can be complex, especially when dealing with entities like single-member LLCs or trusts. Consulting with tax professionals or legal advisors is crucial to ensure compliance and avoid penalties. Understanding FIRPTA is essential for foreign sellers and U.S. buyers involved in real estate transactions. Proper adherence to withholding requirements protects all parties and ensures compliance with U.S. tax laws. The title agents we work with are familiar with FIRPTA and will be happy to assist you further.

This content is for informational purposes only and should not be considered legal or tax advice. Always consult with a qualified professional before making any real estate or financial decisions.