If you are a foreign national or you are assisting a foreign national client in selling real estate, you are most likely familiar with Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). When you are handling a real estate transaction involving a foreign seller, depending on the value of the property and how it will be used, the transaction is generally subject to a 15% withholding on the purchase price due to FIRPTA. The Act places the responsibility of the Buyer for this withholding.
For the purposes of FIRPTA, a foreign seller is defined as either a non-resident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust or estate. A person is considered to be a resident alien under FIRPTA if they have legal permanent resident status in the U.S. (they have a Green Card), and they meet the substantial presence test which sets a minimum number of days they must be physically present in the United States.
The formula for the substantial presence test is as follows:
- 31 days during the current year;
- 183 days during 3-year period
- All the days present in the current year, &
- 1/3 of the days present in the first year prior, &
- 1/6 days present in the second year prior.
If you are buying or selling a property, and the Seller is a foreign national, it is highly recommended that you obtain legal counsel to guide you through the complex particulars and ensure that the financial obligation you are about to embark on is drafted specific to your needs and in your interest. For any questions or assistance, please contact us as we would be happy to guide you.