In 1980, Congress enacted the Foreign Real Estate Investment Tax Act (FIRPTA), 26 USCS 1445. The law states that if a seller of real estate is a “foreign person,” the buyer must withhold a tax equal to 10 % of gross purchase price, unless a statutory exemption applies.
A “foreign person” is a non-resident foreign natural person, a foreign corporation that is not treated as a domestic corporation or a foreign partnership, trust or estate. A resident alien is not considered a foreign person under the law.
Exemptions to FIRPTA
There are a number of exemptions to FIRPTA. A transaction is exempt if:
- the seller of real estate files a non-foreign affidavit declaring, under penalty of perjury, that the seller is not a foreign person
- the transaction involves the transfer of a property acquired for use as the buyer’s residence and the amount obtained is not greater than $ 300,000
- seller obtains a “qualification statement” from the Internal Revenue Service stating that no withholding will be required
Obtaining legal advice
In connection with any sale of real estate that involves a foreign investor, the buyer and seller should consider making a specific agreement regarding FIRPTA compliance. The experience of a real estate attorney can be helpful in avoiding last minute complications and delaying closing. As always, when dealing with the Internal Revenue Service, it is important to proceed with great caution, as “an ounce of prevention is worth a pound of cure.”