Tax laws are different for foreign investors than they are for U.S. investors. The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 (IRC 897) was enacted to encourage tax compliance when a foreign investor sells real estate. U.S. buyers, sellers and realtors who are parties to a real estate transaction involving a foreign investor all need to be aware of FIRPTA. FIRPTA imposes an income tax on the sale of what is termed a U.S. real property interest ("USRPI"). A USRPI includes U.S. real estate owned directly by the foreign investor, as well as, shares owned by a foreign person in 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 puts the burden on the buyer to withhold a portion of the proceeds that they would normally give to the seller. The buyer must then file this withholding with the IRS as prepayment of the foreign seller's tax. Under most situations, this Act requires a mandatory withholding of 10 percent of the purchase price when a foreign investor sells a U.S. real property interest, which is broadly defined. This applies both to real estate and options to purchase, such as preconstruction contracts. The funds must be sent to the IRS within 20 days of the date of sale. If the seller is a foreign person and withholding does not take place in accordance with the law, the buyer and the agent may be held liable for the tax.

 

FIRPTA Tax Rates:

 

A foreign person's gains from dispositions of USRPIs 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 between 26-28%.

• 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 maximum tax rate of 35%.

• Ten Percent Withholding Tax: When the withholding tax under FIRPTA is applicable, the transferee of the USRPI must deduct and withhold 10% of the "amount realized" by the foreign seller. The amount of the seller's gain on the sale is irrelevant. The "amount realized" is usually the purchase price for the property and includes the cash paid to the seller, the fair market value of other property transferred to the seller, and the outstanding amount of any liability assumed by the transferee.