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The Foreign Investment in Real Property Tax Act: What You Need to Know

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.

A Quick Overview

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.

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.

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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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