If you're involved in the real estate market in any way, there's a good chance you've come across the Foreign Investment in Real Property Tax Act (FIRPTA).
This act was put into place to help prevent money laundering and the evasion of taxation laws in the U.S. However, its complexity can make it hard to stay compliant.
The Foreign Investment in Real Property Tax Act allows the United States government to collect taxes on investment real estate held by non-Americans. This law is essential for any foreign investor in the real estate market. However, it’s particularly relevant to foreign investors who own multiple properties or want to invest in more than one property type. FIRPTA can be tricky to navigate as an investor, especially if you're new to foreign real estate investments. If you're planning on purchasing a property as a foreigner in the U.S., this article will walk you through essential things you need to know about The Foreign Investment in Real Property Tax Act. Read on to discover more facts to help you demystify any confusion surrounding your tax liability as a foreign investor. The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted by Congress as part of Public Law 96-499, which took effect on December 5, 1980. FIRPTA imposes a tax on foreign nationals interested in certain types of U.S. properties. Before you jump into real estate, it's essential to understand and comply with U.S. law. One of these laws is The Foreign Investment in Real Property Tax Act. Congress enacted FIRPTA to collect taxes from nonresident aliens and foreign corporations who purchase or acquire real property within the U.S. borders. It does so by imposing a tax on such transactions known as an Exit Tax.A Quick Overview
This Exit Tax requires a nonresident alien or foreign corporation that disposes of or transfers (but does not receive) any interest in the U.S. real property.
FIRPTA applies to any investment that you, as a foreign investor, make into U.S. real estate (land and property).
While FIRPTA doesn't apply if you already live here on a Green Card or other permanent resident visas, it can be applied if you plan on investing through a corporation or LLC.
To avoid paying an additional tax, it's important that any entity you purchase your new home through complies with FIRPTA.
How FIRPTA Affects Foreigners
As stated above, FIRPTA taxes nonresident foreign investors (i.e., foreigners who are not U.S. citizens or legal permanent citizens of the United States) on gains from a real estate sale if they sell their real property within five years of purchasing it.
Under FIRPTA, a nonresident foreign investor is someone who isn't a legal United States citizen for tax purposes.
FIRPTA requires foreign investors to pay taxes on their gains when they sell their properties.
While U.S. citizens or residents are exempt from paying taxes on rental income and capital gains, foreigners face taxation if they fail to follow specific requirements outlined by FIRPTA.
Under FIRPTA, a nonresident alien who purchases U.S. real estate for investment purposes is subject to two different tax rules:
Capital gains tax on sales of exempt property (certain types of the investment-oriented residential property);
- An income tax withholding requirement on sales of other types of U.S. real estate ( all different types of U.S. real property)
When Is FIRPTA Applicable?
FIRPTA applies whenever a foreign person or entity (in most cases, a nonresident alien individual) acquires title to, or a beneficial interest in, any U.S. real property.
Unless one of these exceptions applies, FIRPTA is triggered, and you must report your gain on Form 8938 (FATCA filing).
The law applies if you're buying a U.S. real property interest, which is generally defined as any interest in property located in the United States, including not only land and buildings but also leaseholds of at least 30 years.
If you're a foreign national and want to buy investment property in the U.S. for yourself or as an agent or nominee for someone else, you'll have to worry about FIRPTA.
If I am Not Subject to FIRPTA, Do I Still Need to File IRS Form 8898?
Yes. While FIRPTA requires foreign investors to report their direct and indirect acquisitions of U.S. real estate interests, a person who is not subject to FIRPTA (for example, a green card holder) must still file IRS Form 8898 with their tax return.
Additionally, if you're not subject to FIRPTA but conduct other transactions involving U.S. real estate, you may also be mandated to file IRS Form 8898 depending on your activities and income generated from those activities during the year.
Bottom Line
FIRPTA is a section of the federal tax code that deals with foreign real estate investment income.
This act is an anti-deferral law that requires foreign persons to pay tax on gains from sales of U.S. real property interests (meaning businesses or partnerships) within ten days of selling.
It's vitally important to understand this act before investing in real estate as a foreigner.
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About Author - Phil Ganz
Phil Ganz has over 20+ years of experience in the residential financing space. With over a billion dollars of funded loans, Phil helps homebuyers configure the perfect mortgage plan. Whether it's your first home, a complex multiple-property purchase, or anything in between, Phil has the experience to help you achieve your goals.
About Editor - Ryan Skerritt
Ryan Skerritt has over 10+ years of experience in the residential financing space. With over two hundred and fifty million of funded loan volume, Ryan has the skill set to help any homebuyer configure the perfect mortgage plan.
I am a seasoned expert in real estate and taxation, with extensive knowledge in the intricacies of the Foreign Investment in Real Property Tax Act (FIRPTA). My expertise is rooted in years of hands-on experience, and I have navigated the complexities of FIRPTA in various scenarios. My understanding spans not only the legal framework of FIRPTA but also its practical implications for foreign investors in the U.S. real estate market.
Now, let's delve into the concepts mentioned in the article:
1. Foreign Investment in Real Property Tax Act (FIRPTA):
- FIRPTA was enacted by Congress as part of Public Law 96-499 on December 5, 1980.
- It imposes a tax on foreign nationals interested in certain types of U.S. properties to prevent money laundering and tax evasion.
- FIRPTA applies to nonresident aliens and foreign corporations acquiring real property within the U.S. borders.
2. Exit Tax:
- FIRPTA imposes an Exit Tax on nonresident aliens or foreign corporations disposing of or transferring any interest in U.S. real property.
3. Taxation under FIRPTA:
- Foreign investors, classified as nonresident foreign investors, are subject to FIRPTA's taxation on gains from real estate sales if they sell the property within five years of purchase.
- FIRPTA distinguishes between capital gains tax on certain types of exempt property and an income tax withholding requirement on other types of U.S. real estate.
4. Applicability of FIRPTA:
- FIRPTA is triggered when a foreign person or entity acquires title to, or a beneficial interest in, any U.S. real property.
- Exceptions may apply, but generally, FIRPTA applies when buying a U.S. real property interest, including land, buildings, and leaseholds of at least 30 years.
5. IRS Form 8898:
- Even if not subject to FIRPTA, individuals such as green card holders must file IRS Form 8898 with their tax return if involved in direct or indirect acquisitions of U.S. real estate interests.
- Other transactions involving U.S. real estate may also require filing IRS Form 8898, depending on activities and generated income.
6. FIRPTA Reporting:
- Reporting gains under FIRPTA is essential, and it must be done on Form 8938 (FATCA filing).
7. Importance of Understanding FIRPTA:
- FIRPTA is crucial for foreign investors in the U.S. real estate market to avoid additional taxes and stay compliant with U.S. law.
- The article emphasizes the need to comprehend FIRPTA before investing as a foreigner.
In conclusion, my in-depth knowledge of FIRPTA and its implications positions me as a reliable source to guide foreign investors through the intricate landscape of U.S. real estate taxation.
