What is FIRPTA?
FIRPTA is the Foreign Investment in Real Property Tax Act. It was passed in 1980 and it governs the taxation of foreign persons with respect to their investment in U.S. real property. Generally speaking, FIRPTA imposes a 15% withholding tax on the gross amount of any sale or disposition of U.S. real property interests by a foreign person.
There are some exceptions to this general rule, including for sales or dispositions by a foreign person who is engaged in a trade or business in the United States and for sales or dispositions of interests in publicly traded securities.
The purpose of FIRPTA is twofold:
- To ensure that foreign investors pay taxes on any income they earn from U.S. real estate investments, and
- To prevent foreigners from avoiding U.S. taxes by investing in U.S. real estate through foreign companies
Why Was FIRPTA Created in the US?
FIRPTA was created because the US government wanted to make sure that foreign investors were paying their share of taxes on investments in the US. This was especially important after the Tax Reform Act of 1986, which made it easier for foreign investors to purchase property in the US.
The purpose of FIRPTA is to ensure that foreign investors pay taxes on their U.S. real estate investments in the same way as U.S. investors do. Prior to the enactment of FIRPTA, foreign investors were able to avoid U.S. taxes on their real estate investments by taking advantage of a loophole in the tax code that treated such investments as passive income. FIRPTA closed this loophole and has been a key factor in the growth of foreign investment in U.S. real estate markets.
Despite the important role that FIRPTA plays in ensuring that foreign investors pay their fair share of taxes, there have been some calls for its repeal in recent years. These calls have been driven by concerns that the high withholding tax rates under FIRPTA are deterring foreign investment in U.S. real estate markets. However, there is no evidence that the repeal of FIRPTA would result in an increase in foreign investment, and any such repeal would come at a significant cost to the U.S. Treasury.
What Effect Does FIRPTA Have on Sellers and Buyers of Houses?
How FIRPTA Affects Sellers
FIRPTA affects sellers of U.S. real estate in a few ways.
First, the withholding tax that must be paid to the IRS by the foreign seller can be significant. The tax is 15% of the gross sale price of the property. This can amount to a large sum of money for the seller, especially if the property is sold at a high price.
Another way that FIRPTA affects sellers is by reducing the number of potential buyers for their property. Many potential buyers are foreign investors who would not be subject to FIRPTA’s withholding tax.
This can lead to a longer sales process and/or a lower selling price.
Finally, sellers may have difficulty getting payment from foreign buyers who are subject to FIRPTA. The buyer is required to withhold the 15% tax from the gross sale price and send it to the IRS. This can cause delays in receiving payment and, in some cases, may lead to the buyer backing out of the sale.
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) is a law that requires buyers of U.S. real estate to withhold a percentage of the sale price and send it to the Internal Revenue Service (IRS). The withholding tax is 15% of the gross sale price for properties that are worth more than $300,000.
The person buying the property (the buyer) is responsible for paying the withholding tax, regardless of whether or not they are the actual purchaser. This can lead to delays in closing on the sale and/or affect the final sale price.
How FIRPTA Effects Buyers
FIRPTA affects buyers in a few different ways.
First, it can add an extra layer of complexity to the buying process. The buyer is responsible for withholding the money and sending it to the IRS, which can add time and paperwork to the transaction.
Second, it can increase the cost of buying a property. Because buyers are responsible for paying the withholding tax, they may need to increase their offer price in order to account for it.
Finally, FIRPTA can make it more difficult to sell a property. If the buyer is not able to withhold the required amount of money, they may have to pay a penalty. This can make potential buyers less interested in purchasing the property and could lead to a lower sale price.
When and When Not Homebuyers Should Be Concerned About Receiving FIRPTA?
A home buyer should be concerned about receiving FIRPTA when the home they are buying is considered a “US real property interest.” This includes homes, land, and other buildings located in the US. Buyers should not be concerned about receiving FIRPTA when purchasing properties located outside of the US.
When Can FIRPTA Be Withheld in Florida?
FIRPTA can be withheld in Florida when the property is sold to a foreign person and the seller has not met the requirements to be exempt from FIRPTA. This usually happens when the property is sold by a developer or investment company to a foreign person.
What Are Some of the Benefits of FIRPTA?
There are a few benefits to FIRPTA. One is that it provides some protection for the US real estate market from foreign investors. It also ensures that foreign investors are paying their fair share of taxes on investments in the US.
Are There Any Drawbacks to FIRPTA?
One potential drawback to FIRPTA is that it may make it more difficult for foreign investors to purchase property in the US. This could have a negative impact on the US real estate market.
What is Real Property Interest?
Real property interest is a type of interest in real property that is subject to FIRPTA. It includes an ownership interest, a leasehold interest, and a beneficial interest in a trust or estate.
What defines a foreign person?
A foreign person is any person who is not a US citizen or resident. This includes individuals, companies, and other entities. A United States person is any citizen or resident of the US, as well as any company or other entity that is formed under the laws of the US.
What Are the Exceptions to FIRPTA?
There are a few exceptions to FIRPTA. These include certain interests in real property held by foreign governments and their instrumentalities, as well as certain transactions that are specifically exempt from the law.
Rates of Withholding in FIRPTA
The rates of withholding in FIRPTA vary depending on the type of property that is being sold. For example, if a foreign person sells an interest in a US building, the withholding rate is 15%. If they sell a US share of a company that owns real property, the withholding rate is 10%.
Are There Any Exemptions from FIRPTA?
Yes, there are several exemptions from FIRPTA. These include sales of interests in:
- Principal residences
- Publicly traded securities
- Certain distributions from REITs
- Debt instruments
- Intangible assets such as copyrights and trademarks
- Certain partnerships and LLCs
What is the Penalty For Not Complying with FIRPTA?
The penalty for not complying with FIRPTA can include a fine of up to $100,000 and/or imprisonment for up to five years.
What Are the Exceptions to FIRPTA?
Contact Galaxy Title & Escrow today to gain more understanding of FIRPTA and how it may affect your real estate investment. Our team of professionals has extensive experience handling Florida real estate purchases and sales that may involve FIRPTA. We recognize this can add another confusing layer to the buying and selling process, and we’re here to help!
Mitchell has been a licensed attorney since 2014 and has practiced in both the transactional and litigation fields of law. His experience allows him to approach every transaction with a depth of knowledge and practical experience most attorneys do not possess. Mitchell prides himself on providing top notch service to his clients.
