FIRPTA: What is it and How Will it Impact Me?
Enacted as part of the Omnibus Reconciliation Act of 1980, FIRPTA (the Foreign Investment in Real Property Tax Act of 1980) is a tax law in the United States that imposes an income tax on foreign people who dispose of their real property interests in the United States. U.S. citizens are also required to pay a similar tax, though it is simply included with their other income when filing their taxes each year.
Who Has to Pay FIRPTA?
FIRPTA taxes must be paid in nearly all situations where a foreign owner of U.S. real property interest chooses to dispose of that interest. The only exception would be if you receive a U.S. real property interest in a nonrecognition exchange. Examples of nonrecognition exchanges include:
- Like-kind exchanges
- Corporate formations
- Contributions to or distributions from partnerships
- Certain corporation reorganizations
In most cases, however, foreign individuals are subject to tax on gains that are made from the disposition of U.S. real property interests (USRPIs). By definition, you are considered to have an “interest” in property any time you have direct equity interest. This does not include interest solely as a creditor or as a bank holding a mortgage on the property, but does include a fee simple ownership or co-ownership of a property.
“Real property” is defined as any land, buildings or land improvements. For the purposes of FIRPTA, real property is determined under federal tax law guidelines and not state guidelines. Therefore, while some states may considered gas pumps at a gas station to be real property, federal tax law does not. Federal guidelines do, however, consider unsevered natural products of the land – such as oil in the ground, unharvested crops and uncut timber – to be part of your real property. This means that a U.S. real property interest may include shares of a U.S. real property holding corporation (USRPHC).
Under FIRPTA guidelines, a USRPHC includes any U.S. corporation if more than half of the corporation’s assets were USRPI at any testing date. It is important to not that, while disposition of an interest in a USRPHC is subject to FIRPTA tax, it is not subject to state income tax. This is differs from the disposition of a USRPI interest, which is subject to state income tax but enjoys a lower federal capital gains rate.
How to Pay Your FIRPTA Taxes
To ensure you pay the required taxes on your property, FIRPTA requires foreign buyers to withhold 15 percent of the sales price. This is an increase from the previous 10 percent rate, which is still in effect for personal residences valued at more than $300,000 but less than $1 million. It is possible to reduce the withholding to less than 10 percent by obtaining certification from the IRS that a reduced amount is applicable. You must apply for this certification by filing Form 8288-B no later than the closing date of the sale. Otherwise, you will need to apply to the Internal Revenue Service (IRS) to reduce your withholding to the amount of tax that is actually estimated to be required in order to get back an excess payments that you may have made. These applications are generally approved rather quickly by the IRS.