Unfortunately, the pandemic caused record low numbers of international investments in the US real estate market.
Yet, with the country opening up and international travel resuming, global buyers are showing they still love the US market. And they are eager to buy.
If you’re a foreign person interested in the US real estate market, you must understand the tax laws associated with property. Failure to understand the regulations could mean hefty penalties for you.
This article will tell you all about the importance of the Foreign Investment in Real Property Tax Act.
The History of FIRPTA
Congress enacted the Foreign Investment in Real Property Tax Act (FIRPTA) in 1980. The law ensures foreign investors pay US federal income taxes on the disposition of real property interests. Already, nonresident alien (NRA) people are subject to income tax at the same rate as US citizens.
Before FIRPTA, foreign entities were exempt from US taxes on the disposition of real estate within the US. In addition, foreign people are generally exempt from capital gains tax under United States tax law. But under FIRPTA, foreign entities are now subject to capital gain tax from the disposition of USRPIs.
Even with US tax treaties for capital gains exceptions, FIRPTA stated that these treaty provisions would not apply anymore after a specific date. So at present, the government has amended most tax treaties to conform to FIRPTA.
Understanding the Terms in FIRPTA
A disposition of a property is not limited to a sale. It can also refer to a property exchange, liquidation, redemption, gift, or transfer.
The US government defines real property interest (USRPI) as land, structure, or a corporation interested in real property. It depicts a US real property holding corporation (USRPHC) as a corporation where the fair market value of its USRPI is equal to or above 50% of its total assets.
Changes to FIRPTA
In 2015, Congress made significant changes to FIRPTA in the omnibus spending bill. First, they added a new exemption for qualified non-US pension funds. There are several technical requirements to meet the exemption.
Additionally, the buyer must deduct and withhold a tax on the total amount realized on the disposition if the seller is a foreign person. It’s the buyer’s responsibility to know if the seller is foreign or not.
The tax withholding rate is 15%, up from 10% for dispositions before February 17, 2016.
Again in September 2020, the IRS Large Business and International Division (LB&I) announced an audit campaign to increase NRA compliance concerning FIRPTA.
Now You Know: The Foreign Investment in Real Property Tax Act
The Foreign Investment in Real Property Tax Act can be difficult to understand as with any tax law. But now, you have this guide at your disposal to help you navigate its regulations.
Remember, you should always work with a reputable accounting firm as a foreign person dispositing of a US property to make sure you comply with all tax laws. This is because tax laws are always subject to change.
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