The Foreign Investment in Real Property Tax Act (FIRPTA) plays a critical role in regulating the taxation of U.S. real estate transactions involving foreign investors. Understanding FIRPTA, its withholding requirements, and key exceptions is essential for foreign nationals and entities looking to invest in U.S. real property. This guide provides an overview of FIRPTA’s rules, key definitions, and strategies to ensure compliance and minimize tax liabilities.
What Is the Foreign Investment in Real Property Tax Act (FIRPTA)?
FIRPTA was introduced in 1980 and imposes withholding of tax on dispositions of US Real Property Interests by foreign persons, defined to include non-resident alien individuals or foreign corporations, foreign partnerships, foreign trusts, or foreign estates. In addition, the gains on the sale of USRPI are subject to tax as “Effectively Connected Income” at rates applicable to US residents.
Defining U.S. Real Property Interest (USRPI)
USRPIs are interests in real property located in the United States or the U.S. Virgin Islands, including land, buildings and options to purchase such property. It also means any interest in any domestic corporation that is a U.S. Real Property Holding Corporation (USRPHC), essentially a corporation where the value of its USRPI equals or exceeds 50% of its total assets.
What Qualifies as a Disposition or Distribution?
Disposition includes a sale or purchase, exchange, gift, liquidation, redemption, transfer, and distribution of USRPI, including disposals by an NRA of stock in a USRPHC. However, FIRPTA withholding does not apply when an NRA disposes of stock in a foreign corporation with USRPI as its only asset because such stock is not considered USRPI.
FIRPTA Withholding Requirements Explained
Purchasers of USRPI from NRAs are required to withhold 15% of the amount realized by the seller. A US corporation must withhold 15% of the fair market value of any USRPI distributed to a foreign shareholder if distributed in redemption of stock or in liquidation of the corporation. By contrast, a foreign corporation that distributes a USRPI must withhold 21% of the gain on the distribution to its foreign shareholders. In most cases, the buyer is the withholding agent. US business entities that dispose of USRPI are the withholding agents.
Key Exceptions to FIRPTA Withholding Rules
Withholding is not required where: the seller certifies non-foreign status; the buyer acquires the property as a residence for less than $300,000; the NRA makes a gift and realizes no gain; the seller relies on a non-recognition provision in the tax code or a US tax treaty.
How Proper Structuring Can Help Foreign Investors
To avoid problems with FIRPTA, and US estate tax on us situs assets, such as US real estate, NRAs investing in US real estate should do so through foreign non-transparent entities.
Navigating FIRPTA can seem complex, but understanding its requirements, exceptions, and proper structuring can help foreign investors make informed decisions. By carefully planning investments and seeking professional advice, non-resident aliens can reduce tax exposure while successfully investing in U.S. real estate. Contact us today to learn how we can help you navigate FIRPTA and optimize your real estate investments.
