Non-Resident Taxation on Real Estate

One of the key compliance requirements for foreign investors in U.S. real estate is the Foreign Investment in Real Property Tax Act (FIRPTA).

The Foreign Investment in Real Property Tax Act (“FIRPTA”) authorizes the IRS to tax foreign persons on the sale or disposition of a U.S. real property interest (“USRPI”). FIRPTA generally imposes a withholding obligation on the purchaser of a USRPI.  That is, the purchaser is required to withhold tax on the payment for the property, although withholding may be reduced under certain circumstances.

Rates of Withholding

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

The 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 is owned by a foreign person and at least one other person, 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 who are foreign persons.

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.

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