The Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, is a federal law that applies to any disposition of real property by a foreign person. In general, FIRPTA requires that ten percent of the amount realized from the disposition of the property be withheld and remitted to the Internal Revenue Service after the closing on the property. Understanding how FIRTPA operates, when it applies, and what exceptions may be available is important for anyone involved in real property transactions.
Andy Gustafson
Deferred Gain Significance
In the normal course of business, when you sell a property that has appreciated in value, the gain is subject to federal capital gains taxes according to the Internal Revenue Code as well as subject to state capital gains taxes pursuant to individual state tax laws. The sale of an asset may also be subject to depreciation recapture tax. Both of these potential tax obligations can be deferred if the transaction qualifies for a 1031 exchange.
1031 Exchange Tax Requirements
Section 1031 is a useful section of the tax code that allows a taxpayer to defer taxable gains on a property by using it as an exchange rather than a simple sale. In order to successfully fulfill a 1031 transaction, you need to follow the specific 1031 exchange requirements. The 1031 exchange rules are very precise and need to be followed exactly in order to get the tax deferred exchange.
Reverse 1031 Exchange
In the normal course of events, when you sell real property and realize a gain on the investment, you are subject to capital gains taxes. For example, if you purchased a property for $100,000 and later sell it for $150,000, you may be required to pay capital gains taxes on the $50,000 gained as a result of the sale. The Internal Revenue Code, Section 1031, however, allows certain transactions to qualify for a deferral of the payment of capital gains taxes. In order for a transaction to qualify for a 1031 exchange, you must purchase “like-kind” property to replace the property you sold. Under certain circumstances, you may be able to purchase the replacement property first by using a reverse 1031 exchange.
1031 Exchange Qualified Intermediary
In the United States, when you sell an asset for more that what you paid for the asset, the profit is often subject to the payment of capital gains taxes. The rate at which capital gains are taxed fluctuates, but is generally high. As a result, the actual profit realized from the sale of an asset can be significantly reduced. If the transaction qualifies for an Internal Revenue Code Section 1031 Exchange, however, the payment of any required capital gains taxes can be deferred, making a 1031 Exchange an attractive option. There are a number of rules that must be followed in order for a transaction to qualify for a 1031 Exchange deferral, including the use of a 1031 Exchange Qualified Intermediary.
Timberland Investment and Section 1031 Exchange
As a general rule, when you sell property and realize a profit from the sale, the gain is subject to capital gain taxes by the federal government as well as by many state governments. One way to avoid the immediate payment of capital gains taxes is to defer the payment through a Section 1031 exchange. In order for a transaction to qualify as a 1031 exchange, the transaction must be for “like-kind” property. When the property in question involves a timberland investment, the definition of “like-kind” can become less than clear.