In 1980, the U.S. Government implemented the Foreign Investment In Real Property Tax Act (or“FIRPTA”). The purpose of this law is to impose an income tax on the gains derived by foreignpersons from the sale of their U.S. property.
FIRPTA imposes an income tax on the sale of any U.S. real property interest . This includesU.S. real estate owned directly by a foreign investor, as well as shares owned by a foreign personin a U.S. corporation that owns substantial real estate.
To ensure collection of U.S. taxes that are due on the sale by a foreign investor, FIRPTA also provides a withholding mechanism under which the buyer, who is the “transferee” of the U.S.property, is obligated to withhold 10% of the purchase price at closing and send it directly to the Internal Revenue Service (the “IRS”), instead of paying the full amount to the foreign seller.
Who is subject to FIRPTA? FIRPTA tax is imposed on nonresident alien individuals and foreign corporations.
FIRPTA Tax Rates: A foreign person's gains from dispositions of their U.S. property are subject to income tax under FIRPTA at the same graduated rates applicable to U.S. persons.
Individual Capital Gain Tax Rates: If the investor is a nonresident individual and the real estate qualifies for capital gain treatment, the net capital gain income will generally be subject to a tax rate of approximately 15%.
Corporate Capital Gain Tax Rates: If the investor is a foreign corporation and the real estate qualifies for capital gain treatment, the net capital gain income is currently subject to a possible tax rate in excess of 35%.
Ten Percent Withholding Tax: When FIRPTA applies, the transferee of the U.S. property must deduct and withhold 10% of the "amount realized" by the foreign seller. The amount of the seller's gain actual gain on the sale is irrelevant. The “amount realized” is usually the sales price for the property and includes the cash paid to the seller, the fair market value of any other property transferred by the buyer to the seller, and the outstanding amount of any liabilities paidoff. This withholding tax is treated as an advance payment against the actual Individual or Corporate capital gains tax discussed above.
Withholding Tax Not Final Obligation: The 10% withholding tax imposed on the foreign seller of a U.S. property is not the amount of tax actually due. It is merely an advance payment toward the foreign seller’s U.S. income tax obligation arising from the sale of the property. The foreign seller must file a U.S. income tax return for the year of the sale by the applicable filing deadline.
Such return will show the amount of gain derived from the disposition of the sale of the property and the amount of U.S. income tax due on the gain. The amount of the foreign seller’s final U.S. tax obligation, or refund, is determined by crediting the withholding tax against the amount of income tax shown on the return.