Foreign Investment in US Real Estate

Elizabeth Hale, CPA

FIRPTA Description Foreign Investment in Real Property Tax

Act of 1980 or FIRPTA. Authorizes the U.S. to tax foreign

persons on dispositions Dispositions include sale, exchange,

capital contribution, redemption, distribution or gift.

10% tax on transaction of real estate from foreign persons, some purchaser’s agents, and settlement officers.

Seller must report sale of the real property interests by filing a U.S. Federal Tax Form 1040-NR or Form 1120-F.

FIRPTA not affected Resident alien individual’s are not affected. Considered resident alien if either green card test or substantial

presence test during calendar year is met Green card test - Lawful permanent resident of the U.S. according to the

immigration laws Substantial presence test - you must have been physically present in the

United States

Year Days in U.S. Multiply by Sum of days 2015 130 100% 1302014 120 33.33% 402013 110 16.67% 18

188

Substantial Presence Test

FIRPTA Who it affects Foreign Person - A Foreign Person is a

nonresident alien individual Seller (Transferor) – foreign person that

disposes of U.S. real property subject to 10% tax

Buyer (Transferee) – any person, foreign or domestic, that acquires U.S. property.

FIRPTA Exemptions

Buyer acquires the property for use as a home and the amount realized is less than $300,000

The Seller gives you written notice that no recognition of any gain or loss on the transfer is required because of a non-recognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty

The Seller gives you a certification stating, under penalties of perjury, that the Seller is not a foreign person

FIRPTA Risk

Buyer – any person, foreign or domestic, that acquires U.S. property.

Buyer can be held liable for tax due

FIRPTA Calculations The Buyer must deduct and withhold a

tax equal to 10% of the total amount realized by the foreign person on the disposition.

The amount realized is generally the amount paid for the property.

FIRPTA Corporations A foreign corporation must hold tax equal to

35% A domestic corporation must hold tax equal to

10% of fair market value of property distributed to foreign shareholder if: the shareholder's interest in the corporation is a

U.S. real property interest the property distributed is either in redemption

of stock or in liquidation of the corporation

FIRPTA Example

Foreign Person sells property for $10,000,000

Buyer must deduct $1,000,000 (10% of the amount realized by foreign person)

Step #1 - Determine if the Transaction is subject to FIRPTA…

Step #2 – Consider alternatives to reducing the tax bite….

FIRPTA Summary Seller – foreign person taxed 10% on real property Buyer – any person, foreign or domestic, that

acquires U.S. property. Foreign corporation that distributes a U.S. real

property interest must withhold a tax equal to 35% of the gain if it recognizes the distribution to its shareholders.

Domestic corporation must withhold a tax equal to 10% of the fair market value of the property distributed to a foreign shareholder if: shareholder's interest in the corporation is a U.S. real

property interest property distributed is either in redemption of stock or

in liquidation of the corporation

FIRPTA To Do

File Taxpayer Identification numbers of all parties to the transaction (W-7)

File requests at least 90 days in advance for IRS to process before transaction date (8288-B)

Inform buyer if you are a foreign person before transaction date

Check to make sure seller is not a foreign person

Questions?