The Foreign Investment in Real Property Act of 1980 (mercifully shortened in real estate and tax circles to “FIRPTA”) is a federal law designed to collect taxes on a foreign seller’s “disposition” of real property held in the U.S. The Act casts a wide net and applies not only to the sale of both commercial and residential properties, but also other real property interests such as swimming pools, mines, crops, and timber, just to name a few. Besides the typical sale of real property, the Act also extends to foreclosures and corporate mergers/reorganizations, among other “dispositions” of real property.
Foreign Investment on the Rise
With both residential and commercial real estate prices rising, but still deflated from the highs in 2008, both the U.S. as a whole, and Florida in particular, have experienced an influx of foreign investment in real estate.
It has been reported that, as of June 2012, international buyers accounted for 1 out of every 5 residential home sales in the U.S.; more importantly, international buyers of residential real estate in Florida accounted for a quarter of all U.S. residential sales for the same period. Similarly, over a quarter of Florida commercial realtors reported in a recent survey that they had sold a property to an international investor in the previous twelve months.
Not to be forgotten is Congress’ three year extension, passed in September of 2012, of the Immigrant Investor Bill (“EB-5“), which grants permanent visas to internationals who invest a requisite amount of money in a U.S. enterprise that results in the creation of at least 10 jobs over two years. This bill has provided a non-monetary incentive to investing in U.S. commercial real estate but also has provided financing for developers struggling to obtain loans in a slowly thawing credit market.
The takeaway is that if you’re purchasing a residential home or commercial property, there is a reasonable likelihood that the seller is international.
Why It’s Important
Though the IRS is concerned with collecting tax on the sale of the property from an international seller, FIRPTA requires the buyer of real property to withhold 10% of the purchase price and report it to the IRS.
A buyer may ask, “If the IRS is concerned with collecting taxes from the sale of real property held by international entity, why is it requiring that I withhold the tax from the sale?” Well, because there is a chance following the sale of the property that the international seller’s connection to the U.S. is severed; thus, by requiring the buyer to withhold the 10% tax, the IRS ensures collection of the tax.
Consequently, a buyer who fails to comply with FIRPTA’s withholding and reporting requirements could be the recipient of a surprising tax bill for merely being on the opposite side of a transaction with an international seller.
There are instances where a transaction is exempt. However, the FIRPTA rules, as one might suspect, are complex and lengthy. It’s best to consult with a real estate attorney or tax professional to ensure compliance.