The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) changed the landscape of the way non-resident individuals or corporations in the United States conduct the sales of real property located in the United States. FIRPTA stipulates that any United States real property sold by a non-resident is subject to a 10 percent withholding by the IRS to be used towards the payment of the capital gains tax. This is for the most part a hard-and-fast rule, but the seller can file for a FIRPTA certificate to either reduce or negate altogether the 10 percent withholding upon the sale.
Andy Gustafson
FIRPTA and 1031 Exchange
As a result of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), the United States can tax foreign businesses and individuals on the disposal of real property (real estate) located in the United States. The reason for FIRPTA is to ensure the collection of capital gains taxes that it would previously not be able to pursue if the seller was a foreign individual or entity.
Why Use a 1031 Tax Exchange
The taxes due on the capital gains and claimed depreciation upon the sale of an investment property can be quite substantial, often times to the point where any possible profit on the sale can be eliminated. Enter the 1031 tax exchange. Title 26, Section 1031 of the Internal Revenue Code states that, “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” No gain or loss recognition ultimately means that no taxes are due upon the sale of the old property, or temporarily deferred which can be highly beneficial. The benefits of completing a 1031 tax exchange obviously lie within the tax benefit realm. Here are a couple of reasons to use a 1031 tax exchange.
IRS 1031 Exchange Rules
The benefits of completing an Internal Revenue Service 1031 tax exchange provide compelling reasons for any taxpayer selling property held for investment or trade or business to consider a 1031 exchange. To defer 100 percent of the federal, state and local capital gains and recaptured depreciation taxes requires the taxpayer to reinvest 100 percent of the net sales proceeds and retired debt from the sale of the old property held for the proper intent for a new like kind property.
1031 Tax Exchange
Most often associated with investment real estate, the 1031 tax exchange is an effective way to delay (but not forgive altogether) the payment of federal, state and local capital gains and recaptured depreciation tax for property that is held for the productive use in a trade or business or for investment upon sale. It’s important to understand the concept of the 1031 tax exchange and also certain rules that must be followed in order for the tax deferment to be allowed via IRS Regulations.
Capital Gains Tax Rate Economic Impact
In 2013, the capital gains tax rate increased for those in the upper income brackets. Internal Revenue Code Section 1031 and Treasury Regulations provides a welcome relief for those taxpayers who replace their assets by potentially indefinitely deferring the federal and state capital gain by engaging a Qualified Intermediary to accommodate a 1031 exchange.