Accountant for Foreign Investment in Real Property Tax Act (FIRPTA)

The sale of land and property can be complicated enough without the involvement of niche legislation, but that’s exactly what happens when a foreign entity sells property in the U.S. to an American citizen. The Foreign Investment in Real Property Tax Act of 1980 kicks in during any situation that fits this description. While it primarily hurts the bottom line of the person selling the property, there are still requirements for the buyer.

As with most aspects of the U.S. tax code, the services of a certified public accountant can make navigating this legal labyrinth a lot easier, especially when the accountant in question specializes in international tax applications. The team at U.S. Tax Help has worked in this field for decades led by veteran CPA Ted Kleinman. There’s no better group of professionals to help you through this process. To set up a consultation, call us at (541) 923-0903 today.

The Foreign Investment in Real Property Tax Act of 1980

Though the text of the Foreign Investment in Real Property Tax Act of 1980 can be very convoluted, the spirit of the bill is pretty simple: when a foreign person sells real property located in the U.S., the only way the government can tax that sale is to require the American buyer to withhold the amount due to the government. This is because it is very difficult – legally speaking – to force a foreign citizen to pay taxes to the Internal Revenue Service, even when the property being sold is located in the United States.

The resulting situation is that, in essence, the buyer (or their agent) must tax the seller in order to comply with the law. While this may not affect the buyer financially, it does make them responsible for an important part of the transaction that they might not otherwise consider. Following the steps required by FIRPTA doesn’t have to be a trial, however; with the guidance of a certified accountant, you can ensure that you’re covered both legally and financially.

How to Follow FIRPTA Tax Rules

In most cases, the person who is required to take action is the buyer of the property, though there are other parties who might be required to withhold funds during a transaction with a foreign person. For the sake of the Foreign Investment in Real Property Tax Act, a “foreign person” is any nonresident alien, foreign corporation, or other similar entity. Generally speaking, the foreign branch of a U.S. financial institution and the U.S. branch of a foreign institution are both also considered foreign persons.

It is also important to note that FIRPTA applies primarily to “real property,” which means land and the structures located on it. It also refers to personal property – farm equipment, for example – that is used in conjunction with real property, as well as any financial interest in a mine, well, or other type of natural deposit.

To comply with FIRPTA, the person acting as the withholding agent must retain 15 percent of the purchasing amount on behalf of the IRS, though there are different rules regarding dispositions by foreign corporations. This means that you, the agent in this case, must verify whether the person selling the property is a foreign person and, if so, withhold the required amount; failure to do so could result in you being held liable for the tax yourself.

Withholding Rates and Exceptions for FIRPTA Transactions

While there are default rates that apply to most transactions involving the Foreign Investment in Real Property Tax Act, the fact remains that there are ways to reduce the amount withheld in the transaction, effectively mitigating the tax. Any individual involved in the sale can apply to the IRS for a withholding certificate that will adjust the tax rate for that particular transaction; the IRS will typically respond to these applications within 90 days.

The reasons for the issuance of a withholding certificate can vary, and all of them are subject to the judgement of the IRS. The agency may issue a certificate if:

  1. The amount to be withheld would be more than the seller’s maximum tax liability;
  2. Withholding the adjusted amount would not ultimately prevent collection of the tax;
  3. The seller is exempt from U.S. taxation on gains; or
  4. The buyer or seller have agreed to “the payment of tax providing security for the tax liability.”

A long list of exceptions could also apply to FIRPTA transactions, though one in particular is the most common: When purchasing property for use as a primary residence, the cost of which is $300,000 or less, then your transaction is likely exempt from FIRPTA tax requirements. Additional exceptions exist for interest in a domestic corporation, among other types of interests. A knowledgeable tax expert can further explain the types of exemptions and whether any of them apply to your situation.

Experienced Team of Accountants Specializing in International Tax Laws

Although there are many accountants that could explain the basics of American tax codes, few are as eminently qualified to help with international taxation as the team at U.S. Tax Help. Led by Ted Kleinman, a CPA with more than 30 years’ specialized experience in the field, the accountants of U.S. Tax Help can guide you through even the most convoluted of FIRPTA transactions. For more information or to schedule a consultation, call (541) 923-0903 today.

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