When working with clients from foreign countries, something that easily slips notice is the FIRPTA tax owed when the property is sold. What in the world is FIRPTA? According to the Internal Revenue Service, it is the Foreign Investment in Real Property Tax Act of 1980. The Act authorized the U.S. to tax foreign persons on dispositions of U.S. real property interests. But here’s where it gets tricky,
Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 10 percent of the amount realized on the disposition (special rules for foreign corporations). In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.
Real estate attorney Richard Zaretsky boiled it down to basics, including:
The way FIRPTA works, at the sale the closing agent or the new Buyer must withhold and submit to the IRS 10% of the sale price. Note, that is 10% of the contract sale price, not the net to seller! The Seller then needs to file a tax return and either pay the additional tax (if more would be due) or seek the refund.
So if you’re buying land, a house, or a business from a foreign seller, you might need to note this quirky little law that could bite you hard!