The Foreign Investment in Real Property Tax Act (FIRPTA) took effect in 1984. It imposes income tax on foreign persons in the sale or exchange, liquidation, redemption, gift, transfer of real property located in the United States. Here is a list of what the USA calls “foreign persons”:
• Non-resident Alien Individuals
• Foreign Corporations
• Trusts And Estates
• Expatriates Can Also Subject To FIRPTA
There are also special rules for domestic LLCs with foreign owners. Withholding rates depend on the selling price and the use of the property by the buyer:
• If net proceeds earned are less than $300,000, FIRPTA withholdings can be waived.
• If the net proceeds are $300,000 to $1 million, withholdings are 10% of the amount realized.
• If the net proceeds are more than $1 million, withholdings are 15% of the amount realized.
Another way to avoid FIRPTA is via a withholding certificate. So, if the sale of the property results in a loss to the non-resident individual an application for withholding certificate can be filed. This is called an Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests (form 8288-B). Buying property in the US can be very profitable but know your FRPTA laws before you sell to avoid unplanned expenses. Details of FIRPTA Exemptions can be found on the IRS website.