The Foreign Investment in Real Property Tax Act (“FIRPTA”) is a tax law that was enacted in 1980 in the United States. It ensures that foreign taxpayers pay income tax on the sale of their U.S. real estate. For domestic citizens, capital gains tax money is taken out of regular income tax. In contrast, foreign persons are taxed only on certain items of income and are not taxed on most capital gains items, including real estate. Hence, FIRPTA was put into place and applies to almost any sale where a foreign owner of a U.S. property sells said property.
Originally, FIRPTA mandated that 10% of the property purchase price be withheld for this tax. However, a few years ago Congress passed the Tax Hikes Act of 2015 (also referred to as PATH). Among other changes, this act increased the withholding amount to 15% on $1mil+ properties effective February 17, 2016.
Under this current legislation the following withholding criteria apply:
- Foreign National selling a property valued at $300,000 or less to a buyer who will use as their personal residence: No FIRPTA Tax
- Foreign National selling a property valued between $300,000-$999,999: 10% FIRPTA Tax
- Foreign National selling a property valued at $1 million or over: 15% FIRPTA Tax
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 specifically to your needs and in your interest. For any questions or assistance, please contact us as we would be happy to guide you.