International Seller

FIRPTA - FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT

United States tax law requires that all persons, whether foreign or domestic, must 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. Foreign persons 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 United States real property as effectively connected income subject to regular federal income tax.

To ensure tax collection from foreign taxpayers, FIRPTA requires buyers of U.S. real property interests to withhold 10% of the sales price. The seller may apply to the Internal Revenue Service (IRS) to reduce this 10% to the amount of tax estimated to be due. The IRS routinely and quickly approves such seller applications.

Under FIRPTA, however, foreign persons are subject to tax on gains from disposition of U.S. real property interests (USRPIs).

An interest in property is any direct equity interest in the property, such as a fee simple ownership, but does not include interests solely as a creditor. Thus, co-owners of property each hold an interest in the property, but a bank holding a mortgage does not.

Real property is land, buildings, and land improvements. Generally, whether property is or is not real property is determined under U.S. tax law concepts, not state law. Thus, gas pumps and awnings at gas stations are not real property under U.S. Federal tax law, even though they may be realty under state law.

Withholding

Buyers of U.S. real property interests are required to withhold 10% of the full sales price on ANY purchase of a USRPI, subject to only four exceptions.  Withholding is not required:

a.       By a purchaser for use as a residence for a price $300,000 or less, OR

b.      Where the purchaser receives a statement from the seller that the seller is a not a foreign person.

c.       Upon acquisition of an interest in a nonpublicly traded domestic corporation where the corporation provides the required affidavit.

d.      Upon acquisition of shares of a publicly traded corporation.

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.

It is strongly recommended to check with an accountant before selling a property in order to properly deal with it as a foreign seller.