Are you purchasing Real Property from a Foreign Person?

Foodman CPAs & Advisors
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On 9/14/20, the IRS announced 4 New Compliance Campaigns . One Campaign addresses FIRPTA (Foreign Investment in Real Property Tax Act of 1980) Reporting Compliance for Non-Resident Aliens (NRAs).  FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.  This IRS campaign is intended to increase FIRPTA voluntary compliance through issue-based examinations and external education and outreach. The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to FIRPTA. The buyer/transferee is the withholding agent and is generally required to withhold 15% of the amount realized on the sale, file the required forms, and remit the tax to IRS.
 

What is a disposition?

For purposes of the Internal Revenue Code, a disposition means “disposition” or a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are generally required to withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition (special rules for foreign corporations).

The Withholding Agent

The buyer (the transferee) is the withholding agent and is required to file the required forms, and remit the tax withheld to IRS.  The buyer (transferee) must find out if the transferor is a foreign person. If the transferor is a foreign person, tax is withholdable, and the buyer fails to withhold, the buyer may be responsible for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.

What are U.S. Real Property Interests?

A U.S. real property interest is an interest in real property located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of real property. It also means any interest in any domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or the 5-year period ending on the date of disposition (applicable periods).

What are the Rates of Withholding?

The transferee must deduct and withhold a withholdable tax on the total amount realized by the foreign person on the disposition. The rate of withholding is 15% (10% for dispositions before February 17, 2016).

What is the total amount realized

It 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
  • The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.

IRS identifies FIRPTA as a Compliance Reporting risk area for Nonresident Aliens and U.S. Persons

IRS is determining that FIRPTA presents noncompliance risk. Nonresident Aliens and US Persons ought to plan ahead in order to structure their holdings and dispositions properly and comply with all the associated tax reporting and compliance.  Accurate interpretation of the law is critical for avoiding errors or omissions.  Anyone involved with foreign owners of U.S real property ought to work with an experienced tax professional to avoid issues with the IRS.   Who is your Tax Professional?  © 

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