Tax Law on Foreign Investment in Real Estate

In 1980, Congress enacted the Foreign Investment in Real Property Tax Act (FIRPTA), 26 USCS 1445. The law states that if a seller of real property is a “foreign person,” the buyer must have tax equal to 10% of the gross purchase price, unless an exemption under the law applies.

A “foreign person” is a nonresident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust, or estate. A resident alien is not considered a foreign person under the law.

FIRPTA exemptions

There are a number of exemptions to FIRPTA. A transaction is exempt if:

  • the seller of real estate provides a non-foreign affidavit establishing under penalty of perjury that the seller is not a foreign person
  • the transaction involves the transfer of a purchased property for use as the buyer’s residence and the amount realized is not more than $300,000
  • the seller obtains a “qualifying statement” from the Internal Revenue Service stating that withholding will not be required

Obtaining legal advice

In connection with any sale of real estate involving a foreign investor, the buyer and seller should consider entering into a specific agreement regarding FIRPTA compliance. The experience of a real estate attorney can be helpful in avoiding complications that might otherwise arise at the last minute and delay the closing. As always, when dealing with the Internal Revenue Service, it’s important to proceed with an abundance of caution, as “an ounce of prevention is worth a pound of cure.”

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