Resources: Explaining FIRPTA

A guide for understanding who and what FIRPTA may affect.

A Guide for FIRPTA:


Understanding FIRPTA -

In your process of purchasing or browsing a home or property, it is likely at some point you will run across a term coined: FIRPTA. To provide a better understanding and resource for those with questions, we'll go over what FIRPTA is, who/what it applies to, and how it works.


FIRPTA, otherwise known as the Foreign Investment in Real Property Tax Act, is a legislative tax law describing the process in which income tax is imposed on foreign owners selling real estate within the United States[i]. To clarify, a foreign owner extends beyond persons or individuals and could also be a corporation outside of the United States. Therefore, FIRPTA allows for the collection of potential taxes on the gain realized in the sale of real property by a foreign owner or entity.


Who Does FIRPTA Apply To?


FIRPTA applies to all foreign owners or entities; however, FIRPTA may affect, in addition to, any buyer(s) engaging in the purchase of a real property owned by a foreign owner, entity, or even a trust or partnership. How this affects buyers is defined below.


What Does FIRPTA Apply To?


We know that FIRPTA applies strictly to foreign owners or entities, but to describe what FIRPTA applies to would mean to describe the term real property. Real property typically refers to land; however, this includes all structures, minerals, or otherwise any natural or man-made object inclusive to that parcel of land[ii]. This would simply mean all land, vacant or improved, can be subject to FIRPTA.


How Does FIRPTA Work?


In the sale of real property where the seller is a foreign national or entity, the law requires that the buyer(s), regardless of nationality, withhold 15% (fifteen percent) of the purchase price and remit the funds to the IRS. The seller, a foreign individual or entity, may obtain a U.S. Taxpayer ID number and file a tax return at the end of the year; any possible gains can be claimed as income. Calculations will be made on the gains to determine the tax amount, and if the withholding amount exceeds the tax amount, the seller can receive a refund of the excess withholding[iii]. If the foreign national or entity does not have a Taxpayer ID number, they will not be able to file a tax return and therefore will not be able to receive a refund of the excess withholding.

A photo of a question mark enclosed within a home outline depicting questions about real estate or FIRPTA.

Last modified on April 26, 2020.

Citations

[i] FIRPTA Withholding | Internal Revenue Service. (2019, December 20). Retrieved from Internal Revenue Service (IRS):  https://www.irs.gov/individuals/international-taxpayers/firpta-withholding


[ii] LII. (n.d.). Real property | Wex | US Law | LII / Legal Information Institute. Retrieved from LII / Legal Information Institute: https://www.law.cornell.edu/wex/real_property


[iii] FIRPTA Withholding | Internal Revenue Service. (2019, December 20). Retrieved from Internal Revenue Service (IRS):  https://www.irs.gov/individuals/international-taxpayers/firpta-withholding

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