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.
Sale of Real Property
FIRTPA applies to all “dispositions” of real property. A disposition can be a sale, redemption, gift, exchange or any other transaction that is considered a “disposition” under the Internal Revenue Code. If the seller, or transferor, of the property is a foreign person, then assume that the FIRTPA rules apply.
It is important to understand that the ten percent required to be withheld under FIRTPA is not the actual tax amount that is owed on the property. The final tax obligation may be significantly less, or more, than ten percent, depending on the transferor’s income tax return filed for the year in which the transaction takes place. The ten percent amount is akin to a deposit on any tax obligation ultimately owed by the transferor. The buyer, or transferee, has the responsibility of withholding the required ten percent and remitting it to the IRS within 20 days after closing on the transaction.
FIRPTA Exceptions
There are few exceptions to the ten percent withholding rule within FIRPTA. One exception that does exist, however, to the general rule is when the sale is for less than $300,000 and the buyer intends to use the property for personal purposes as a residence for at least 50 percent of the time the property is in use for the next two 12 month periods following the transfer. As with all laws, this exception is subject to change so be sure to check prior to assuming it is available.
If the transferor believes that the final tax obligation due on the transaction will be significantly less than the ten percent required by the FIRPTA rules, he may apply to the IRS for a withholding certificate. If approved, the certificate will waive some, or all, of the ten percent required to be withheld at closing. This typically happens when the transferor stands to suffer a loss as a result of the transaction. For example, if the transferor bought the property for $750,000 and is now selling it at a loss for only $600,000 then no tax will ultimately be due on the transaction.
Additional articles of interest include:
Contact our office at 800.227.1031 to discuss the impact of FIRPTA on your transaction.
