International investors are an important part of the real estate market in the U.S and the State of Florida, with reported purchases by the National Association of Realtors of $4.8 billion of U.S. commercial real estate in 2018 and $121 billion of residential property in 2017-2018. However, what many foreign investors might not know is that when it comes time to sell, they are subject to FIRPTA withholding.
The Foreign Investment Real Property Act or FIRPTA was passed by U.S. congress in 1980 to tax foreign investors on dispositions of U.S. real property interests. For the IRS, a disposition can include a sale or exchange, liquidation, redemption, gift, transfers, etc of real estate property.
FIRPTA applies to foreign corporations, partnerships and other entities selling U.S. real properties. It also applies to individual sellers who are considered non-residents.
Under FIRPTA, when a foreign investor is selling a real estate property, the buyer or its agent is required to withhold 15% of the amount on the disposition.
This amount realized is the sum of:
- The cash paid, or to be paid (principal only);
- The fair market value of other property transferred, or to be transferred; and
- The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.
If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.
A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 21% of the gain it recognizes on the distribution to its shareholders.
A domestic corporation must withhold tax on the fair market value of the property distributed to a foreign shareholder if:
- The shareholder's interest in the corporation is a U.S. real property interest, and
- The property distributed is either in redemption of stock or in liquidation of the corporation.
The IRS will withhold this amount until it has verified that all taxes due by the non-resident are paid. Foreign investors can apply for the refund of the excess withheld amount if applicable, by filing a U.S. tax return in the year following the sale. There are also other exceptions for the FIRPTA withholding that may apply under certain circumstances.
If you have any questions about how FIRPTA withholding might affect your real estate investment, contact one of our entity advisors.