Blog

Basics of FIRPTA

April 25, 2019

In recent years, the U.S. has seen increasing numbers of foreign persons investing in U.S. real estate. This investment is concentrated in certain areas of the country. Some areas, such as Seattle, have contemplated additional taxes specifically for foreign real estate buyers. The purpose of such a tax would be to stabilize the real estate market for the benefit of domestic buyers. In the case of Seattle, the additional tax would be essentially an imitation of the Vancouver foreign buyer’s tax, which we discussed in an earlier blog post. If the tax eventually passes, it won’t be a surprise. State’s have a clear interest in protecting their domestic markets. Likewise, the U.S. federal government also has an interest in profiting from foreign involvement in U.S. real estate markets. Toward this end, the U.S. has already implemented a law which helps to capitalize on foreign investment.  

The Purpose Behind the Law

The Foreign Investment in Real Property Tax Act, or FIRPTA, ensures that the U.S. collects taxes on real estate dispositions by foreign persons. When a “non-resident alien” sells a U.S. real estate interest, that person will fall within the purview of FIRPTA. In this post, we will discuss the basic provisions of FIRPTA. We will also go over how the FIRPTA law operates in a 1031 context. As we will see, the provisions of FIRPTA are fairly straightforward. However, FIRPTA imposes a bit of a burden for foreign persons. Foreign persons will need to plan ahead if they wish to avoid the withholding requirements of the FIRPTA law. Foreign persons preparing to sell U.S. real estate should consider contacting a tax attorney for FIRPTA counsel. 

Basic Provisions of FIRPTA 

The Congress implemented FIRPTA in 1980. Its purpose is to guarantee that foreign persons pay taxes on any capital gains. Apparently, Congress and the IRS consider foreign persons to be a greater liability for nonpayment of taxes on capital gains. Accordingly, FIRPTA requires that the buyer of the property withhold 15% of the gross sales price. Buyers then remit this percentage to the IRS. This withholding ensures that the foreign person will in fact pay taxes on any realized gains. This percentage – 15% – applies to foreign individuals. The percentage is higher when the foreign person be either a corporation, trust or other entity.  

Potential Buyer Liability

The provisions of FIRPTA are important to both foreign sellers and buyers. Among other reasons, this is because buyers will be liable for the tax should the IRS be unable to collect from foreign sellers. This is counter-intuitive, but it is true nonetheless. If no tax is withheld pursuant to FIRPTA, the IRS may approach the foreign seller to satisfy the tax. But, if this attempt to collect from the foreign seller be unsuccessful, then the buyer is on the hook. And, even if the foreign seller satisfies the tax, the buyer may be liable for interest and penalties. Hence, buyers have a clear interest in understanding and complying with the provisions of FIRPTA. 

The Definition of a Non-Resident Alien 

FIRPTA uses a particular definition of non-resident alien. A non-citizen who doesn’t pass either the green card test or the substantial presence test is regarded as a non-resident alien. Currently possessing a green card, or possessing a card in the last calendar year, will render a non-citizen as a resident alien. The substantial presence test requires a specific number of days of residence within the U.S. A person needs to reside in the U.S. for more than 31 days in the current year. In addition, that person also needs to reside for more than 183 days over a 3-year period. If these requirements are met, then the person is classified as a resident alien. 

Section 1031 as an Exception to FIRPTA 

FIRPTA applies to nearly all dispositions of U.S. real estate by foreign persons. However, there are a few exceptional cases in which the FIRPTA withholding may be removed. One key exception is a tax-deferred exchange pursuant to Section 1031. A foreign person may invoke Section 1031 if that person intends to reinvest in U.S. business or investment real estate. In such a scenario, the foreign person may remove the withholding requirement of FIRPTA. However, the foreign person must obtain a specific document in order to overcome the withholding requirement. This document is a “1031 Declaration and Notice.” The buyer can rely on this document only if the foreign person plans to complete a simultaneous exchange. What’s more, the buyer must ensure that the foreign person does not intend to receive any boot in the exchange. This makes sense, because boot would create a taxable event and necessitate withholding. 

If a foreign person wishes to complete a delayed exchange, that person may still overcome the withholding requirement. This requirement may also be suspended if boot is received. In such cases, the foreign person will need to obtain a different document, however. The foreign person needs to complete IRS Form 8288-B and apply for a withholding suspension. In any 1031 scenario, foreign persons should consult with a tax attorney in order to ensure all rules are followed correctly.  

Call Our New York City Tax Attorneys For Help

The finer points of FIRPTA can be quite complex. But this post should serve as a decent introduction to this topic. The attorneys at Mackay, Caswell & Callahan, P.C., are available to help in these types of situations. Our professionals have perused the provisions of FIRPTA and can offer counsel in this area. Complying with the rules of FIRPTA is imperative. Procuring experienced counsel is a must. If you’re planning to dispose of real estate, please contact one of our top New York City tax attorneys today. 

Image credit: https://www.lendingmemo.com/ 

As seen on

Client reviews

How can I help you?

You can contact us using this form day or night, 24 hours a day, 7 days a week, 365 days a year. You will hear back from one of our attorneys the same day or next day.





    If you would like to speak with a team member immediately, we are available 24/7 via this form — or via phone toll-free from 6am – 8pm EST M-F at: 844 - MCC - 4TAX

    schedule an appointment with us

    Call Toll Free
    844 - MCC - 4TAX
    send a message
    Contact Us
    send a message
    Contact Us