What is FIRPTA?

They are the acronym for the Foreign Investment in Real Property Tax Act of 1980.

Who does FIRPTA affect?

FIRPTA affects any nonresident alien individual and foreign companies not considered domestic corporations. From a tax point of view (tax reporting) when a person does not reside or a foreign corporation or partnership sells property within the United States, it will be subject to the provisions of FIRPTA.

How does it affect you?

At the time of notarization (closing of transaction) the seller will be made a withholding of 10% on the sale price, in transactions less than $1,000,000 and 15% if the sale price is over $1,000,000. For example, a “foreign investor” sells property for US$350,000, the closing agent (company or attorney processing the title) will retain US$35,000 in a special account called an “escrow account”, until the “foreign investor” files their income tax return in January of the calendar year following the closing of the sale.

What is the difference between Withholding and Tax?

Withholding is the mechanism by which the Treasury (IRS) “forces” the foreign individual or company to submit their return to determine if there is a profit or loss in the transaction.

Once the return is made and the IRS determines the amount to be charged as tax, the difference between withholding and tax is refunded to the seller.

Can this withholding be avoided?

It is very important to give adequate attention and planning to this point, so that there are no negative surprises at closing time.

Buying in a personal name or in the name of a company is one of the most important elements in the Firpta application. However, it is not only the type of legal structure but the internal constitution that could make the difference. On the other hand, Firpta is only one of the factors to take into account, therefore it is extremely important to know the advantages and disadvantages of the different purchase structures (LLC, S-Corp, Trust, Inc, etc.)

How does it affect buyers?

As a buyer, you must ensure that the withholding is made in the event that the seller is a “non-resident foreign individual or foreign company not considered a national corporation”; otherwise, you could be responsible for paying that withholding.

Likewise, it is important that as a foreign buyer you ensure that you create the most effective legal structure to deal with this lien in the event of a future sale.

LEGAL NOTE: FIRPTA provisions are complicated and require the expertise of a real estate attorney or CPA who can fill out the proper applications and assess the potential implications. At no time should this information be taken as advice.