If you are a foreign real estate investor, investing in USA real estate, you ABSOLUTELY must know about The FIRPTA Laws when formulating your exit strategy.
This post should raise your attention if you are a foreign investor who has not heard about the FIRPTA laws. Nothing to fear here as long as you have information in advance because your exit strategy will depend on knowing this information going into the investment.
What is FIRPTA (Foreign Investment In Real Estate Property Tax Act)
In its simplest form, this law means that, should you as an foreign investor own real estate, the IRS wants to make sure that you pay for the necessary taxes that you may owe. We are talking about capitol gains tax on the sale of your property. Because you are not a U.S. resident, they want to make sure that they get any tax owed by you before you sell your assets and leave the country. To do this, they put the FIRPTA law into place. What it means is at the time of sale, when you close (settle) on the property, the title company or closing attorney must withhold 10% of the contract price and turn it into the IRS until such time as they establish what your tax liability (if any) actually is.
Any amount or all of it will be returned to you once your tax liability (if any) is settled. Note: as of now, this only applies to any sale over the value of $300K.
I recently sold a property that was owned by a Canadian. The property sold for $335,000. As I am a realtor who works with Foreigners every day, I was very much aware of the process and started addressing this tax implications the day I listed the property. The IRS wanted us to hold $33,500 until they established what the Canadian’s Tax liability was to be. As we had started the process early on, it was only 5 weeks after closing (settlement) that the IRS declared she had no tax liability and the funds were returned to her. This process, start to finish, was a good 3 months and could be longer. It all depends on how quickly you provide the IRS with their needed information.
So basically FIRPTA is a tool the IRS uses to insure they get their taxes due to them. Here is what a she could have done to avoid tying her money up and what many savvy investors do. (You have a couple of options)
- purchase your investments within a U.S. Based LLC or trust -when a U.S. entity purchases a property this element is not considered a foreign investment (always consult with your legal and tax person about these structures, how they apply to you and to your country of origin)
- purchase lower price point properties that will sell for less than $300,000 at time of sale
We specialize in helping overseas investors purchase USA real estate. If you are considering purchasing a property in the United States, we would be happy to help, give us a call at 941-718-7761.