It stands for the Foreign Investment in Real Estate Tax Act of 1980. (Foreign Investment in Real Property Tax Act).
Who is affected by FIRPTA?
FIRPTA affects any non-resident foreign individual and foreign companies not considered domestic corporations. From a tax perspective (tax return), when a non-resident person or a foreign corporation or partnership sells property within the United States, it will be subject to the provisions of FIRPTA.
How does it affect?
At the time of protocolization (closing of transaction) the seller will be subject to a withholding of 10% on the sale price, in transactions less than $1,000,000 and 15% if the sale price is above $1,000,000. For example, a “foreign investor” sells property for US$350,000, the closing agent of the transaction (company or lawyer who processes the title) will retain US$35,000 in a special account called “escrow account”, until the “foreign investor” files its income tax return in January of the calendar year following the closing of the sale.
What is the difference between Withholding and Tax?
Withholding is the mechanism through which the Treasury (IRS) “forces” the individual or foreign company to present its return to determine if there is profit or loss in the transaction.
Once the declaration is made and the IRS determines the amount to be charged as tax, the differential between the withholding and the tax is returned to the seller.
Can this retention be avoided?
It is very important to give adequate attention and planning to this point, so that there are no negative surprises at closing time.
Buying in a personal name or in the name of a company is one of the most important elements in the Firpta application. However, it is not only the type of legal structure but also the internal constitution that could make the difference. On the other hand, Firpta is only one of the factors to take into account, therefore it is extremely important to know the advantages and disadvantages of the different purchase structures (LLC, S-Corp, Trust, Inc, etc.).
How does it affect buyers?
As a buyer, you must ensure that the withholding is made if the seller is a “non-resident foreign individual or foreign company not considered a national corporation,” otherwise you could be responsible for paying that withholding.
Equally, it is important that as a foreign buyer you ensure that you create the most effective legal structure to deal with this withholding in the event of a future sale.
LEGAL NOTE: The provisions of FIRPTA are complicated and require the expertise of a real estate attorney or CPA who can complete the appropriate applications and evaluate the potential implications. At no time should this information be taken as advice.
