Understanding FIRPTA

FIRPTA, The Foreign Investment Real Property Tax Act

What is FIRPTA? The Foreign Investment Real Property Tax Act is a law enacted in 1980 and states that if a seller of real estate located in the United States is a foreign national the Buyer must withhold a tax equal to 10% of the gross purchase price (26 U.S.C. & 1445(a).

The reality is that in Arizona, the title company would take care of this “holdback” and process it with the IRS for the buyer. The Foreign National Seller would or could then apply to get some or all of this money back from the IRS based upon their tax situation.

What many Foreign National Buyer’s don’t know is that they should apply for a Federal EIN (Employer Identification Number) prior to or just after you buy a home in the U.S. Why? Because it prepares you for the day you sell the property. Don’t wait until you want to put the property on the market, because it may take months to get the EIN number. This could delay your closing. You don’t want to close without it. The EIN number allows the title company to file the withholding under your number so you can file to get the withholding back (if you qualify).

Here is how it is stated directly on the IRS Website (link: http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding :
FIRPTA Withholding
Withholding of Tax on Dispositions of United States Real Property Interests

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 10 percent of the amount realized on the disposition (special rules for foreign corporations). In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.

Bottom line:
1) if you are a foreign national seller, get your EIN number before you put your home on the market.
2) If you are a buyer of home from a foreign National, know your responsibility that you need to withhold 10% of the gross sale by using your title company to do so.

Lastly, We are REALTORS® not tax advisors, so please check with a qualified tax advisor to make sure you take the right steps for your specific situation. Always seek professional help for the area of interest you are dealing with and do not trust anything you read on the internet. Verify, verify, verify.

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