What is FIRPTA?

What is FIRPTA?

FIRPTA is the Foreign Investment in Real Property Tax Act of 1980. It is a United States tax law that imposes income tax of foreign persons disposing of US real property interests.

Why Was FIRPTA Created?
For domestic citizens, capital gains tax money is taken out of your regular income tax. In contrast, foreign persons are taxed only on certain items of income and are not taxed on most capital gains items, including real estate. This being the case, FIRPTA was put into place to ensure that the government gets their piece of the pie when a foreign person living in the US sells real estate. It applies to almost any sale where a foreign owner of a US property sells said property.

Federal Withholdings:
To ensure the taxes are collected, buyers of real estate that fall under this tax act are required to withhold 10% of the sales price from the seller and deposit it with the IRS. This 10% deposit is applied to taxes owed on the sale (or transfer) of the property. If the actual taxes are calculated to be less than 10% of the sales price, the seller will receive a refund for the difference. If no taxes were owed, the entire deposit is refunded to the seller.

President Obama enacted the Protecting Americans for Tax Hikes (PATH) Act. This law creates significant changes to the Foreign Investment in Real Property Tax Act (FIRPTA).

What does this new rule change about withholding requirements?
The path act increases the FIRPTA base withholding rate from 10% to 15% of the amount realized on the sale of real property by a foreign person (or transferor). If the sales price does not exceed $1,000,000, Real Property sold by a foreign person that is to be used as a residence by the buyer qualifies for a reduced rate of 10%. If the buyer is not using the property as a residence, the new 15% withholding rate is for all transactions. If the price is higher than $1,000,000, the 15% withholding rate is applicable for all transactions.

What are the benefits?
The PATH Act benefits the real estate industry by doubling the maximum amount of stock ownership a foreign person may have in a real estate investment trust (REIT) from 5% to 10%. Another additional benefit is that the law permits certain foreign pension funds to invest in REITs without having FIRPTA withholding apply. 

Exemptions to the Rule
If one or more of these circumstances apply, a seller may be exempt from this law:

• The sales price is less than $300,000 and the buyer has definite plans to reside in the home for at least 50% of the first 24 months that the property is being used by any person
• The seller provides written certification that they are not a foreign person
• The buyer recieves a withholding certificate from the IRS that excuses the withholding
• The amount the seller realizes on the sale or transfer of the property interest is zero

https://go.homebay.com/learning-center/firpta-affidavit

https://www.irs.gov/individuals/international-taxpayers/firpta-withholding

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