FIRPTA: Foreign Investment in Real Property Tax Act… Never heard of it? To be honest, neither had I until this past week. As it turns out, many of the people subject to the requirements were not aware of it either. A recent audit found several hundreds of millions of dollars of noncompliance.
FIRPTA requires an income tax withholding when there is a disposition of U.S. real property by a foreign person. The transferee/buyer is usually the withholding agent. For example, if I bought a home in the U.S. from someone who was not a US citizen that lived in another country I may be required to withhold part of the transaction.
The government essentially doesn’t want outside investors to buy real property in the U.S, sell it at a gain, and never pay the tax on the gain. Therefore, they make a withholding requirement and then the seller can file the appropriate tax documents to get a refund if too much withholding was withheld.
This is a withholding, not a tax on the buyer. In other words, there should be no negative financial ramifications to the buyer when purchasing from a foreign person if the correct actions are taken. Therefore this should not dissuade you from buying from a foreign person just make sure if you think it is possible this rule applies that you do additional research. There are many exceptions.
Interesting Article(s) or Video(s)
IRS.gov - FIRPTA Withholding
Information on the FIRPTA straight from the IRS.
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Thank you for reading!