Understanding FIRPTA: What Foreign Investors Need to Know
- Jodie Cordell
- Aug 7, 2024
- 2 min read
Key Takeaways:
FIRPTA requires foreign persons to pay U.S. income tax on gains from selling U.S. real estate
Buyers must generally withhold 15% of the purchase price when acquiring property from a foreign seller
Exceptions exist for properties sold under $300,000 and intended as the buyer's residence
Foreign sellers can apply for reduced withholding by filing Form 8288-B
Compliance is crucial to avoid penalties and ensure smooth transactions
Foreign investment in U.S. real estate can be an excellent opportunity, but it comes with unique tax considerations. The Foreign Investment in Real Property Tax Act (FIRPTA) is a crucial piece of legislation that all foreign investors must understand before diving into the U.S. real estate market.
FIRPTA, enacted in 1980, requires foreign persons to pay U.S. income tax on gains from selling U.S. real estate. This act was designed to ensure that foreign investors contribute their fair share to the U.S. tax system.
Under FIRPTA, buyers are generally required to withhold 15% of the purchase price when acquiring property from a foreign seller. This withholding serves as a prepayment of the tax that may be due on the gain from the sale.
However, there are exceptions to this rule. For instance, if the property is sold for less than $300,000 and the buyer intends to use it as their residence, no withholding is required. This exception aims to simplify transactions for smaller, residential purchases.
Foreign sellers have the option to apply for reduced withholding by filing Form 8288-B with the IRS. This form allows sellers to calculate their actual tax liability, which may be less than the standard 15% withholding.
Compliance with FIRPTA is crucial. Failure to adhere to these regulations can result in significant penalties and complicate real estate transactions. Both buyers and sellers should work with tax professionals familiar with FIRPTA to ensure proper compliance.
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