FOREIGN SELLERS & FIRPTA
The disposition of a U.S. real property interest by a foreign person - seller (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. This legislation was enacted to address concerns that foreign investors were purchasing US real estate and then selling it for a profit without paying any tax to the United States. A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations that are considered U.S. real property holding corporations. Persons purchasing U.S. real property interests (transferee) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold ***10 percent*** of the amount realized (special rules for foreign corporations). Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.
***FIRPTA withholding rate was increased from 10% to 15% in the beginning of 2016 except in the case of sales of residences intended for personal use by the acquirer, if the purchase price does not exceed $1 million. Thus, if the previous exception for personal residences (where the purchase price does not exceed $300,000 – in which case no withholding is required) does not apply, the 10% withholding rate is retained so long as the purchase price does not exceed $1 million. If the price is higher than $1 million, the new 15% rate will apply. The new rate will apply to sales on or after February 17, 2016.
As there are some exceptions to FIRPTA, it is recommended that you discuss details of your particular case/situation with a US attorney and / or accountant in order to determine the exact amount of this tax that would be due on your transaction.
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