In 1980, Congress enacted the Foreign Investment in Real Property Tax Act (FIRPTA), 26 U.S.C.S. 1445. The law provides that if a seller of real property is a “foreign person,” the buyer must withhold a tax equal to 10% of the gross purchase price, unless an exemption applies under the law.
A “foreign person” is a non-resident 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.
Exemptions to FIRPTA
There are a number of exemptions to FIRPTA. A transaction is exempt if:
- the seller of real property furnishes a non-foreign affidavit stating under penalty of perjury that the seller is not a foreign person
- the transaction involves the transfer of a property acquired for use as the buyer’s residence and the amount realized is not greater than $300,000
- the seller obtains a “qualifying statement” from the Internal Revenue Service stating that no withholding will be required
Obtaining Legal Counsel
In connection with any real estate sale involving a foreign investor the buyer and the seller should consider making a specific agreement with regard to FIRPTA compliance. The expertise of a real estate attorney may be helpful to avoid complications that may otherwise arise at the last minute and delay the closing. As always, when dealing with the Internal Revenue Service, it is important to proceed with an abundance of caution, as “an ounce of prevention is worth a pound of cure.”