Foreign Investment in Real Property Tax Act: Overview, definition, and example
What is the Foreign Investment in Real Property Tax Act (FIRPTA)?
The Foreign Investment in Real Property Tax Act (FIRPTA) is a U.S. tax law that imposes tax obligations on foreign individuals and entities who invest in U.S. real property. Under FIRPTA, foreign investors are subject to U.S. taxation on the sale or disposition of U.S. real property interests. Specifically, when a foreign person sells or transfers U.S. real property, a withholding tax is generally applied to the gross sales price of the property. This law ensures that foreign investors pay taxes on income generated from U.S. real estate investments.
Why is the Foreign Investment in Real Property Tax Act important?
FIRPTA is important because it ensures that foreign investors who profit from U.S. real estate transactions pay their fair share of U.S. taxes, just as domestic investors do. It is also crucial for compliance with U.S. tax laws and helps prevent tax evasion in cross-border real estate deals. The tax withheld under FIRPTA helps guarantee that the U.S. government collects the appropriate tax revenue from foreign investors, who otherwise might not be subject to U.S. taxation on their income.
Understanding FIRPTA through an example
Suppose a foreign company owns commercial real estate in New York City and decides to sell the property for $10 million. Under FIRPTA, the buyer is required to withhold 15% (or another applicable percentage) of the sale price, which is $1.5 million, and remit it to the IRS. This withholding serves as a prepayment toward the foreign seller’s U.S. tax liability on the sale, which will be adjusted when the foreign investor files their tax return.
Example of how FIRPTA may be referenced in a contract
Here’s how a reference to FIRPTA may appear in a real estate transaction agreement:
"The Buyer agrees to comply with all applicable provisions of the Foreign Investment in Real Property Tax Act (FIRPTA), including withholding the required tax from the Seller’s proceeds in the amount of [X]% of the sale price, and remitting such withholding to the IRS."
Conclusion
The Foreign Investment in Real Property Tax Act is a key tax law that ensures foreign investors are properly taxed on U.S. real property transactions. It establishes clear requirements for withholding taxes on the sale of real property and helps prevent tax avoidance by foreign individuals or entities. Parties involved in real estate transactions with foreign investors must be aware of FIRPTA’s provisions and ensure compliance with its tax withholding and reporting requirements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.