It's the Foreign Investment in Real Property Tax Act of 1980. It is a tax law that
applies to foreign persons who are disposing of U.S. property.
Who does FIRPTA affect?
FIRPTA affects all non-resident aliens and foreign companies not considered to be
American corporations. From a taxation (tax return) standpoint, when a person who
doesn't live in the United States or when a foreign corporation sells a property in the
United States, they shall be subject to FIRPTA provisions.
How does it affect buyers and sellers?
At the time of closing, buyers are required to withhold 10% of the sales price in
transactions valued below $1,000,000 and 15% of the sales price in transactions
valued above $1,000,000. For example, a foreign investor sells a property for
$350,000 (USD). The closing agent of the transaction (the company or lawyer that
processes the title deed) will retain $35,000 (USD) in a special escrow account, until
the foreign investor presents their federal income tax return in January of the next
calendar year following the closing of the sale.
What is the difference between “withholding tax” and “tax?”
Withholding tax is the mechanism whereby the IRS forces the foreign individual or
company to submit their tax return to determine if a profit or a loss resulted from
Once the tax return is submitted and the IRS determines the amount to be charged
as tax, the difference between the withholding tax and the tax is returned to the
Can this withholding be avoided?
It's very important to properly plan this out to avoid negative surprises at closing.
Buying in your own name or through a company is one of the most important
elements in the application of FIRPTA. However, the type of legal structure and the
internal makeup could make a difference. On the other hand, FIRPTA is only one of
the factors that should be taken into consideration, so it's extremely important you
know the advantages and disadvantages of the different purchasing structures (LLC,
S-Corp, Trust, Corporation, etc.).
How does it affect the buyer?
As a buyer, you should make sure the withholding tax is implemented in case the
seller is a non-resident alien or a foreign company not considered a U.S. corporation.
If you don't make sure it's implemented, you may be responsible for paying the taxes.
On the other hand, as a buyer, it's important to make sure you create the most
effective purchasing structure to deal with this withholding tax for a future sale.
LEGAL NOTICE: The provisions of FIRPTA are complicated and require the
expertise of a real estate lawyer or public accountant. They can fill out the proper
forms and evaluate the possible implications. The information provided herein
should not be considered a source of legal or financial advice. Please contact a
professional in your area to receive information and guidance that applies to
your individual situation.