Foreign Investment in Real Property Tax Act

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), enacted as Subtitle C of Title XI (the "Revenue Adjustments Act of 1980") of the Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, 94 Stat. 2599, 2682 (Dec. 5, 1980), is a United States tax law that imposes income tax on foreign persons disposing of US real property interests. Tax is imposed at regular tax rates for the taxpayer on the amount of gain considered recognized. Purchasers of real property interests are required to withhold tax on payment for the property. Withholding may be reduced from the standard 15% to an amount that will cover the tax liability, upon application in advance of sale to the Internal Revenue Service. FIRPTA overrides most nonrecognition provisions as well as those remaining tax treaties that provide exemption from tax for such gains.
The 2015 omnibus spending bill significantly altered the FIRPTA.
Overview.
The United States tax law requires all people, whether foreign or domestic, to pay income tax on dispositions of interests in U.S. real estate (U.S. real property interests). Domestic persons are subject to this tax as part of their regular income tax. Internal Revenue Code sections 897 and 6039C were enacted in FIRPTA; the Act also made conforming amendments to other various provisions of the Internal Revenue Code.
Foreign people are taxed only on certain items of income, including effectively connected income and certain U.S. source income. Foreign persons, however, are not taxed on most capital gains. Internal Revenue Code section 897, as enacted by FIRPTA, treats the gain on a disposition of an interest in US real property as effectively connected income subject to regular federal income tax.
To ensure tax collection from foreign taxpayers, FIRPTA requires U.S. real property interest buyers to withhold 15% of the sales price. The seller may apply to the Internal Revenue Service (IRS) to reduce this 15% to the amount of tax estimated to be due. The IRS routinely and quickly approves such seller applications.
FIRPTA applies in virtually all cases where a foreign owner of a U.S. real property interest disposes of that interest. Provisions of the law preventing recognition of gain generally do not apply unless the seller receives a U.S. real property interest in a qualifying nonrecognition exchange.
History.
Before 1981, foreign people (nonresident, non citizen individuals, and non-U.S. corporations) often were exempt from U.S. tax on sale of real estate in the nation. Congress passed FIRPTA to require all foreign people to pay tax on dispositions of any interests in U.S. real estate. The law specifically provided that its provisions took precedence over any existing tax treaties that provided otherwise.
Persons and property subject to tax.
Foreign persons are generally exempt from U.S. tax on capital gains.
Under FIRPTA, however, foreign persons are subject to tax on gains from disposition of U.S. real property interests (USRPIs).
Gain recognition.
Taxpayers generally must recognize gain upon disposing property. Where the proceeds are received in more than one year, the gain is recognized proportionately over the years received.
Taxpayers exchanging property may not be required to recognize gain on certain transactions, such as like-kind exchanges, corporate formations, contributions to or distributions from partnerships, certain corporate reorganizations, and certain other transactions. FIRPTA provides that such nonrecognition provisions generally do not apply, and gain must be recognized. Two exceptions apply. First, gain is not recognized if the property received in the exchange is a USRPI which, if disposed of immediately after the exchange, would be subject to FIRPTA. Second, the IRS may provide other exceptions in regulations. Temporary regulations providing very limited exceptions have expired. Regulations provide limited exceptions treating certain partnership interests as USRPIs, and thus nonrecognition.
Amount of gain.
Under general U.S. tax principles applicable to FIRPTA, gain is equal to the excess of the amount of money or fair market value of property received over the amount of adjusted basis of the property exchanged. Where the amount received is subject to a contingency, the amount is not recognized until the contingency is resolved.
Tax imposed.
FIRPTA gain is subject to tax as effectively connected income. Nonresident alien individuals are subject to tax on such income at regular graduated tax rates for U.S. individuals. The deduction for personal exemptions, certain adjustments to gross income, and most itemized deductions are not allowed. Foreign corporations are subject to tax on such income at regular corporate income tax rates. The branch profits tax under Internal Revenue Code section 884 may apply, subject to the branch termination exception. The alternative minimum tax may also apply.
Withholding.
As of February 17, 2016, buyers of U.S. real property interests are required to withhold 15% of the full sales price on any purchase of a USRPI; an increase from the previous 10% rate. However, the 10% withholding rate does remain in effect for personal residences valued above $300,000 and below $1 million. This is subject to only four exceptions. Withholding is not required:
To the extent withholding is required, the amount of withholding may be reduced below 10% of the full price only upon certification by the IRS that a reduced amount applies. Such certification is permitted only if the seller applies to the IRS for reduced withholding by filing Form 8288-B no later than the closing date of the sale. The certification will specify the proper amount of withholding, subject to the stated closing price.
Penalties apply to a purchaser who fails to withhold, file Form 8288 with the IRS, or pay the required withholding within 20 days of the sale.
Treaties.
Many U.S. tax treaties formerly provided exemption from tax for gains on dispositions of many sorts of U.S. real property. FIRPTA specifically provided that such treaty provisions would not apply after a particular date. Most U.S. tax treaties have subsequently been amended to conform with FIRPTA treatment.
See also.
Congressional Budget and Impoundment Control Act of 1974