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For foreign real estate investors, there is much to navigate and understand when investing in the United States. FIRPTA (the Foreign Investment Real Property Tax Act) can be a complex issue for both novice and experienced investors alike; indeed, it brings with it certain personal income tax liabilities which require vigilance to ensure compliance. In this blog post, we will explain the key aspects of FIRPTA, how they affect foreign real estate investments in the United States, and what investors need to be aware of moving forward.
The Foreign Investment Real Property Act or FIRPTA was passed by the U.S. Congress in 1980 to tax foreign investors on dispositions of U.S. real property interests. For the IRS, a disposition can include a sale or exchange, liquidation, redemption, gift, transfer, etc of real estate property.
FIRPTA applies to foreign corporations, partnerships, and other entities selling U.S. real properties. It also applies to individual sellers who are considered non-residents.
Under FIRPTA, when a foreign investor is selling a real estate property, the buyer or its agent is required to withhold 15% of the amount on the disposition.
This amount realized is the sum of:
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If the property transferred was owned jointly by the U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.
A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 21% of the gain it recognizes on the distribution to its shareholders.
A domestic corporation must withhold tax on the fair market value of the property distributed to a foreign shareholder if:
The IRS will withhold this amount until it has verified that all taxes due by the non-resident are paid. Foreign investors can apply for a refund of the excess withheld amount if applicable, by filing a U.S. tax return in the year following the sale. There are also other exceptions for the FIRPTA withholding that may apply under certain circumstances.
It is important to note that FIRPTA is a complex tax law, and failing to comply with its requirements can result in significant penalties. Consult with a tax professional about FIRPTA to ensure you are in compliance with the law.
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In conclusion, compliance with FIRPTA withholding can be a daunting task for real estate owners. It's critical to ensure that all related taxes are paid timely, as failure to do so could result in severe penalties. Thank you for taking the time to learn about FIRPTA and its legal requirements. Our advisors will help you navigate through every step of the process so that you can rest assured that your real estate transactions are completed in compliance with all laws and regulations. Whether you're a first-time investor or an experienced owner, we have the knowledge and experience necessary to help you understand everything there is to know about FIRPTA withholding.
Contact our trusted advisors right now who will walk you through the process and make sure everything is done correctly and within deadlines. When it comes to financial investments, our advisors take nothing less than absolute dedication and commitment toward customer satisfaction.
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