What is FIRPTA?

The acronym “FIRPTA” stands for the Foreign Investment in Real Property Transfer Tax Act. This law, passed in 1980, applies to non-U.S. Citizens and foreign entities. FIRPTA allows the United States Federal Government to withhold income tax that is owed at the point in time when property is transferred. As can be the case with many regulations enforced by the Internal Revenue Service, FIRPTA can be confusing and inscrutable. Below you will find the finer points of this law explained.

The Effects of FIRPTA

The Foreign Investment in Real Property Tax Act of 1980 withholds the income tax of the transferor of property, should he or she be of foreign nationality, upon the disposition of U.S. real property interests. FIRPTA was enacted to mitigate the government’s loss on capital gain tax by foreign individuals and entity upon the sale of a piece of property. In truth, rather than theory, FIRPTA can hamper the transaction and cause the seller to pay tax in excess of what is owed.

The law ensures that the U.S. Government collects off a capital gain, even if the foreign owner has just sold the sole remaining asset tying him or her to the U.S. The tax withheld amounts to 10 percent of the gross sale price, meaning that a property sold at a loss will be subject to the same tax rate as any other. The only means to recover any portion of this tax, in the event the seller overpaid, is to file with the IRS at the end of the fiscal year. For more information, visit Marina Title’s Investors page. 

To Whom FIRPTA Applies

Direct or indirect interests held individuals and entities in real property are subject to FIRPTA. There are a handful exemptions to this withholding, including:

• The personal residence purchased is valued at $300,000 or less
• The transaction is categorized as a non-recognition transfer
• The realization of the transaction amounts to zero

A seller’s only other recourse is to apply for a withholding certificate. If submitted before the closing date, the 10 percent withheld is paid into the escrow account. Until the IRS confirms the reduction applied for, the company managing the account will hold onto those funds. Applying for this certificate, however, is a labyrinthine process, requiring the foreign seller to obtain an international taxpayer identification number (ITIN), and the buyer must present a taxpayer identification number (TIN). The assignation of an ITIN can drag on from 5 weeks to 3 months.

An Alternative to FIRPTA

Forming a U.S. corporation preempts FIRPTA, because the entity owning the property is now based, for tax purposes, within the United States. Of course, the corporation will still have to file IRS Form 5472, the Information Return of a 25% Foreign-Owned U.S. Corporation, as well as report all individuals and/or entities that are related to the owners of said corporation.

The professionals at Marina Title are extremely well-versed in the finer points of FIRPTA and any other laws and regulations affecting the Florida real estate market. We courteously offer our knowledge and expertise in a highly personalized manner. Contact us by email at [email protected], or by phone at (305) 901-5628