Many international property buyers and sellers find themselves faced with unfamiliar rules and regulations when investing in property in the United States. One regulation that most commonly raises questions is the Foreign Investment in Real Property Tax Act of 1980, also known as FIRPTA.
FIRPTA Basics
The Foreign Investment in Real Property Tax Act of 1980 is a tax on the disposition of U.S. real estate interests by foreign sellers. In general, if the seller is not a U.S. citizen, the United States Internal Revenue Service (IRS) requires that the property sale be taxed at 10% of the purchase price.
A “disposition” can take the form of a sale, exchange, liquidation, redemption, gift or transfer. Real estate interests may include sales of interests in real estate or sales of shares in U.S. corporations that are considered U.S. real property holding corporations.
Exemptions to this rule do, of course, exist. The most common exemption is when the purchase price is less than $300,000 and the buyer purchases the property as a personal residence. If this is the case, withholding may not be required.
Other exemptions include, but are not limited to:
- Seller provides a non-foreign affidavit stating under penalty of perjury that the seller is not a foreign person.
- The seller has obtained notification from the IRS that no withholding is required.
- The seller is pursuing a 1031 Tax Deferred Exchange.
A foreign person is defined by the IRS as a nonresident alien individual, foreign corporation that has not made an election under section 897(i) of the Internal Revenue Code to be treated as a domestic corporation, foreign partnership, foreign trust, or foreign estate. It does not include a resident alien individual.
Help Is Available Through A Title Insurance Agency
As confusing as FIRPTA can be for buyers and sellers alike, there is help. One good place to seek advice and assistance in complying with FIRPTA requirements is at the title agency that will be conducting the closing on the property. Title agencies and real estate professionals must know how to operate within FIRPTA requirements. A title agency will know how to determine if the seller is a foreign investor or not, particularly if they handle the notary responsibilities, and may be acting as the escrow agent in the closing as well.
Generally, the seller will inform the escrow agent if he or she is a foreign resident and the escrow agency will then pass this information on to the buyer. It is very common for the escrow agent to withhold the required funds and to remit payment to the IRS on behalf of the seller. Chances are good that if your title agency and escrow agent are one in the same, they will be able to handle all FIRPTA requirements on your behalf.
Working with experienced real estate professionals that understand FIRPTA requirements for foreign sellers or investors will make your real estate transaction as smooth as possible.
Title Junction, a Cape Coral notary and title insurance agency, serves clients throughout Florida and Fort Myers. Fort Myers Notary, escrow and witness courtesy closing services are also offered by this real estate title agency. To learn more about Title Junction and their services please visit them here.
