Buying a property in the United States is a great option to allocate your money. No matter if you want to invest or acquire a second home, the American real estate market is friendly and open to foreigners. Even buying a home can help in the process of an E2 Visa. There are several elements that must be foreseen when entering the world of American real estate. One of these is the FIRPTA law.

What is FIRPTA?

FIRPTA stands for Foreign Investment in Real Property Tax. In Spanish this means the Law on the Tax on Foreign Investments in Real Estate. This law was enacted in 1980 and was amended in 2015 by the General Spending Bill (Rope & Grays, 2015).

FIRPTA is a federal tax law. So it applies nationwide, regardless of state. This law imposes an income tax on foreign persons who sell real estate in the United States.

How was FIRPTA born?

According to the National Association of Realtors (2020), FIRPTA was devised as a response to the increase in agricultural land acquisitions by foreigners. Prior to its enactment, foreign investors often avoided paying taxes on the sale of U.S. real estate. Putting at a disadvantage U.S. citizens who could be audited for it. The enactment of FIRPTA sought to level the tax treatment between foreign and domestic investors.

What acts are taxed with the FIRPTA?

The prestigious firm Norton Rose Fulbright (2018) explains that the FIRPTA is an exception to the tax treatment of foreigners. Normally, in the United States, nonresident aliens are taxed only on their gains from the alienation of property that is “effectively connected” with the conduct of a commercial or business activity within the United States. This is called “effectively connected income.”

In this sense, the FIRPTA has a special treatment, according to which it is considered that the profits obtained by a foreign person due to the alienation of a real estate interest will always be treated as an “effectively connected income”. Which makes them subject to U.S. federal income tax. It is necessary to clarify that a disposition is not limited to sale; but it can be: exchange, settlement, reimbursement, donation or transfer of a real estate interest.

Under U.S. law, real estate interests are considered to:

  • Real estate such as land, buildings, improvements, leases and natural deposits; located in the U.S. and the Virgin Islands.
  • With certain exceptions, to the shares of a U.S. real estate holding company.
  • The gains made on the revaluation, or income, generated by real estate.
  • Interests in companies that own real estate interests in the United States.
  • Options to acquire U.S. real estate interests.

How does FIRPTA affect the purchase of real estate in the United States?

As explained above, any property that a foreigner buys will be subject to the payment of this tax. This payment is made at the time of buying the property and it is the buyer who must retain and inform the U.S. government.

It is important that when calculating your investment take into account this tax when estimating the price of the property. Either for purchase or sale. Well, if you do not withhold the required amount, or do not declare and pay the tax on time, you may be subject to sanctions (Internal Revenue Service, n.d.)

Retention Percentage

The buyer of a real estate interest is obliged to withhold and pay to the government 15% (previously it was 10% but increased to 15% in 2015) of the amount obtained in the alienation) (Internal Revenue Service, n.d.).

This withholding represents an advance payment of the tax generated by the sale of real estate interest. This withholding may be higher or lower than the final tax liability. It is paid on the seller’s U.S. income tax return. In the event that the withholding is greater than the final amount, the seller is entitled to a refund of the excess withholdings.

For example:

If you plan to sell a home for $400,000, you must give the buyer 15% of its value; that is $ 60,000 dollars for this to inform the government. In the event that your income tax return estimates that capital gains are less than this percentage, for example 10%, you will be able to claim the difference of 5% in your tax return.

Exceptions to FIRPTA

There are some exceptions to the application of this law, according to which the seller does not have to withhold the tax. However, the notification requirements (Internal Revenue Service, n.d.) must still be met. Some of these exceptions are:

  • When a natural person acquires a property to use it as a residence and the price does not exceed $ 300,000 dollars.
  • Real estate interest from a stake in a publicly traded U.S. company.
  • When the seller is a qualified foreign pension fund (“QFPF”).

Buying real estate in the United States and especially property in Miami is a smart investment, as long as you know how to navigate between the various taxes in the United States. Whether it’s paying federal taxes or paying state taxes, take your time, plan your investment, and take action. In this way you will have guaranteed success.

References

Internal Revenue Service (n.d.). FIRPTA Withholding. Retrieved from https://www.irs.gov/individuals/international-taxpayers/ FIRPTA-withholding.

Internal Revenue Service (n.d.). Foreign Investment in Real Property Tax Act (FIRPTA). Retrieved from https://www.irsvideos.gov/Individual/education/ FIRPTA

National Association of Realtors (2020). Foreign Investment in Real Property Tax Act (FIRPTA). Retrieved from https://www.nar.realtor/foreign-investment-in-real-property-tax-act-FIRPTA

Norton Rose Fulbright (2018). Foreign Investment in Real Property Tax Act: A first. Retrieved from https://www.nortonrosefulbright.com/es-mx/knowledge/publications/b7d17100/foreign-investment-in-real-property-tax-act-a-primer

Ropes&Gray (2015). Omnibus Bill Includes Significant Changes to Tax Law Regarding FIRPTA, REITs, and RICs. Retrieved from https://www.ropesgray.com/en/newsroom/alerts/2015/December/Omnibus-Bill-Includes-Significant-Changes-to-Tax-Law-Regarding-FIRPTA-REITs-and-RICs.aspx