The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) is a United States tax law that often presents difficult challenges for foreign companies and/or investors seeking to dispose of their real property interests within the States. Due to the complex intricacies found within its provisions, foreign investors often find themselves in a legal bind when trying to navigate the muddled waters of FIRPTA. Failing to comply with FIRPTA obligations has exposed foreign property owners to serious liabilities and prosecution by the Internal Revenue Service.
At Antonoplos & Associates, our experienced team of tax attorneys is ready to assist you in navigating FIRPTA requirements and help your mitigate its financial impact on your real property transaction.
In the United States, all persons – both foreign and domestic – are required to pay income tax on dispositions of their real property interests. When a U.S. citizen sells their real property asset, the profit from that transaction is taxed as regular income tax. This, however, is not how the law operates with respect to foreign individuals. Unlike domestic citizens, foreigners are taxed only on certain income items, which excludes most capital gains. FIRPTA, therefore, was created to ensure that foreign individuals did not escape tax liability with respect to profit from real property sales transactions.
How It Works
Under FIRPTA, dispositions of U.S. real property by foreign persons are subject to income tax withholding. This tax is paid to the IRS through regular income tax filings at the regular tax rates for the type of taxpayer on the amount of gain recognized.
When the seller of a real property interest is not a resident of the United States, the Foreign Investment in Real Property Tax Act of 1980 requires that 15%* of the sales price be withheld by the transferee. The 15%* withholding rate may be reduced upon the issuance of an IRS certification stating that a reduced withholding rate is permitted.
*The withholding rate increased from 10% to 15% for dispositions made after February 17, 2016.
At Antonoplos & Associates, our attorneys have extensive experience dealing with Foreign Investment in Real Property Tax Act of 1980 issues and have learned to navigate this complex IRS process with both dexterity and efficiency. If you are a non-U.S. resident considering selling your real property interest, please allow the competent attorneys at Antonoplos & Associates guide you through this process.
Key Terms Unique To FIRPTA
Many terms found throughout the FIRPTA provisions are wholly unique to this Act. Below are just a few key terms that are necessary to understand in order to have an accurate understanding of the Act itself.
- S. Real Property Interest. A “U.S. real property interest” includes actual property (such as land), improvements on property, personal property items, and undeveloped natural resources. This term also encompasses assets that are less commonly through of as property, such as shares in stock; interest in a corporation; interest in a partnership; and any other ownership rights to a U.S. business or real estate.
- Foreign Person. Under FIRPTA, a “foreign person” is defined as a nonresident alien individual, a foreign corporation, a foreign partnership, a foreign trust or foreign estate. Foreign person does not include foreign persons legally residing in the United States.
- FIRPTA defines a “Disposition” as a disposal for profit of a U.S. real property interest by sale, exchange, gift or any other transfer. A disposition includes distributions to shareholders of a corporation, partners of a partnership and beneficiaries of a trust or estate.
Withholding And Exemptions
FIRPTA requires buyers of real property interests to withhold 15%* of the sales price by filing a Form 8288 with the IRS and turning over the withheld funds to ensure that Foreign Investment in Real Property Tax Act of 1980 taxes are paid. If the withholding is not properly carried out by the buyer, that individual/entity may be help responsible for the amount not paid.
There are a number of important exceptions that allow buyers to escape their withholding responsibilities under FIRPTA. Four of the key exceptions include:
- ou (the transferee) acquire the property for use as a residence and the amount realized (sales price) is not more than $300,000. You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant. For this exception, the transferee must be an individual.
- The property disposed of is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded corporations.
- The disposition is of an interest in a domestic corporation and that corporation furnishes you a certification stating, under penalties of perjury, that the interest is not a U.S. real property interest. In most cases, the corporation can make this certification only if either of the following is true.
- During the previous 5 years (or, if shorter, the period the interest was held by its present owner), the corporation was not a USRPHC.
- As of the date of disposition, the interest in the corporation is not a U.S. real property interest by reason of section 897(c)(1)(B) of the Code. The certification must be dated not more than 30 days before the date of transfer.
- The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor’s name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).
- The transferor can give the certification to a qualified substitute. The qualified substitute gives you a statement, under penalties of perjury, that the certification is in the possession of the qualified substitute. For this purpose, a qualified substitute is (a) the person (including any attorney or title company) responsible for closing the transaction, other than the transferor’s agent, and (b) the transferee’s agent.
- You receive a withholding certificate from the Internal Revenue Service that excuses withholding. See Withholding Certificates , later.
- The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the Ogden Service Center, P.O. Box 409101, Ogden, UT 84409.
- The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
- The property is acquired by the United States, a U.S. state or possession, a political subdivision, or the District of Columbia.
- The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale, exchange, or exercise of that option.
- The disposition is of an interest in a publicly traded partnership or trust. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded partnerships or trusts.
Please note: the certifications in items (3) and (4) are not effective if you (or the qualified substitute) have actual knowledge, or receive a notice from an agent (or substitute), that they are false. This also applies to the qualified substitute’s statement under item (4). For more information regarding Certification please contact Antonoplos & Associates at 202-803-5676 .
If you (or the substitute) are required by regulations to furnish a copy of the certification (or statement) to the IRS and you (or the substitute) fail to do so in the time and manner prescribed, the certification (or statement) is not effective.
Mitigating Your Tax Burden Under FIRPTA
Though it is almost impossible for foreigners selling their real property interests in the United States to circumvent their FIRPTA obligations, there are actions individuals can take to mitigate the impact that FIRPTA will have on their capital gains. Specifically, individuals may apply to reduce the withholding amount to just 10% of the estimated tax. Similarly, individuals may purchase and dispose of assets using a domestic corporation, although additional disclosures will then need to be filed.
It is important to understand that these tactics only change the taxation process; they do not eliminate the tax burden completely. The attorneys at Antonoplos & Associates stand ready to discuss your unique FIRPTA situation and will work with you to develop a plan best mitigates your tax burden and keeps the most money in your pocket.