Real Estate Law Article

Foreign Investment in Real Property Tax Act

By: Clark, Campbell, Lancaster & Munson, P.A.

Q: I am interested in purchasing property owned by a foreign person.  What do I need to know?

A: During the past few years, there has been an influx of foreign investors from Canada, Europe, and South America purchasing property in Florida.  While purchasing property in Florida can be a wise investment for a foreign person, anybody buying property from a foreign person should proceed with caution.

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted by Congress in 1980 to require foreign persons pay taxes on gains when selling property located in the United States.

Under FIRPTA, the buyer, and not the foreign seller, is required to withhold a certain percentage of the purchase price at closing and remit that amount to the Internal Revenue Service shortly after the closing.  In most closings, the buyer usually enlists the services of the attorney handling the closing to handle the withholding and remit the withholding along with certain required forms directly to the IRS on behalf of the buyer.

FIRPTA does not apply to a resident alien if the resident alien meets what is known as the “Green Card Test,” which, as the name implies, requires the foreign person possess a Green Card, or the “Substantial Presence Test,” which requires determining how long the foreign person has been present in the U.S. over a certain period of time prior to the closing.

A foreign person includes a nonresident alien, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U.S. person.

Recently some changes have been made to FIRPTA, and effective February 16, 2016, in some cases, the standard 10% withholding amount has been increased to 15%.

Most types of U.S. income received by a foreign person are subject to a federal tax of 30%, but a reduced rate or exemption may apply if there is a tax treaty between the foreign person’s country of residence and the U.S.  If the amount withheld exceeds the amount eventually due from the foreign person, the foreign person may obtain a refund from the IRS.

In some cases, if the buyer intends to use the property as the buyer’s personal residence, no withholding is necessary.  However, a buyer should beware of any foreign seller who is pressuring the buyer to claim the personal residence exception in order to avoid withholding if that is simply not true.  Under FIRPTA, the buyer’s liability can be up to the amount of tax to be withheld plus interest.  Furthermore, if the buyer willfully fails to withhold or notify the IRS, the buyer commits a felony and could face imprisonment up to five years and a $10,000 fine.
If you plan to purchase property owned by a foreign person, make sure the attorney handling the closing is familiar with FIRPTA, asks all of the right questions, and handles the withholding aspect if necessary.

The April 7th edition of “The Law” will discuss how courts are handling foreclosures when banks lose the original mortgage documents.

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