Gidney & Company, P.A., CPA's

Foreign Investment in Real Property Tax Act and Withholding Requirements

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) is a part of the US Income Tax Code which specifically imposes an income tax on the sale of US real property interests by Non Resident Alien (NRA) individuals, partnerships and corporations.  When a NRA sells US real property they are required to report the sale by filing a US tax return for the year of the sale, and pay any income tax due on the capital gain (net profit), if any, as would any US resident.

For a NRA individual, Form 1040 NR, the US Nonresident Alien Income Tax Return, must be filed for the year of sale.  If there are multiple owners on title such as husband and wife, or a joint venture or partnership, then each individual will have to file a tax return.  For the year, all US source income must be reported.

To ensure collection of this tax from foreigners the IRS requires a withholding tax to be collected at closing.  The transferor (buyer) and/or transferors agent can be held liable for any tax not paid by the transferee (seller) should they fail to follow IRS guidelines.

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CALCULATING CAPITAL GAINS –

TAXABLE PROFIT

Tax is assessed on the profits know as capital gain which is the difference between the “tax basis” and the sales price( Sales price less Cost), adjusted for selling costs (commissions, excise taxes, escrow charges, etc.)  Under US regulations, the tax basis is the original purchase price, including acquisition costs and other legal expenses to perfect or defend title, plus any improvements (land, dwelling costs, outside of normal repairs) made to the property, including any utility service assessments.  Note that property taxes, mortgage interest, association dues are not included in the basis on non-income producing property.  If the property is, or was, a rental, then the basis will be adjusted for depreciation, and taxation may become more complex.

Additionally, if there is a capital gain on the sale of real property, then such gain will be subject to the Alternative Minimum Tax (AMT).

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OTHER RULES

Exclusion for Sales under $300,000

A buyer who purchases property as his primary residence for less than $300,000 is not required to withhold funds, if the buyer is going to use the property as primary residence and willing to sign document to attesting  to that. Your closing attorney will help you here.

Sec 1031 Tax Free Exchange

There may be the opportunity for the seller to enter into a transaction where he/she would not recognize gain. Seek professional assistance.

Estate Taxes

Depending on how property is titled there may be a death tax. Seek professional assistance. 

Seek appropriate counsel or call Gidney & Co, CPA at (305) 866-6266. 

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