Written by attorney Steven A. Culbreath

Don't let FIRPTA de-rail your real estate transaction!

There has been much controversy and excitement (some good, some bad) regarding the "Foreign Investment in Real Property Tax Act" (aka "FIRPTA"). In cases where a non U.S. owner buys (and subsequently sells) real estate property in the United States, FIRPTA, may apply to your purchase. FIRPTA is a tax law that imposes U.S. income tax on foreign persons selling U.S. real estate. Under FIRPTA, if you buy U.S. real estate from a foreign person, you may be required to withhold 10% of the amount realized from the sale.The amount realized is normally the purchase price. This also applies in situations where the foreign owner sells U.S. real estate and wants to re-locate overseas (i.e. outside the U.S.). If FIRPTA applies to your transaction, then within 20 days of the sale, there is a requirement to file Form 8288 with the IRS. Along with the form, you submit 10% withholding. It is important to know about FIRPTA, because if you do not withhold the required amount, file the form on time, and submit the withholding, penalties do apply. There are some exceptions. For example, FIRPTA law does not apply if you are buying a residence for $300,000 or less. The sale of U.S. real property by a foreign owner is subject to tax on the capital gain (profit made on the overall buy/sell transaction). To ensure that this tax is paid by a foreign owner who may have severed his only connection to the U.S. by way of this sale, FIRPTA requires a withholding tax apply at the time of sale. This tax withholds 10% of the GROSS sale price, which means that 10% is withheld, even if you sell the property at a LOSS! One way to avoid the FIRPTA withholding problem altogether is to form a U.S. corporation, owned by the foreign entity, to hold the real property. Since the entity that holds the property being sold is now a U.S. corporation, FIRPTA does not apply. This approach avoids the withholding tax, and allows the foreign entity to escape the lengthy process of applying for an ITIN. One drawback to the use of a U.S. corporation is the required filing of Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation, with the IRS. Not only does this form require the reporting of any foreign individual or entity that owns 25% or more of the U.S. corporation, but it also requires reporting all individuals or entities that are related to 25% foreign owners. This "related" requirement includes a foreign asset protection trust that owns the foreign entity that in turn owns the U.S. corporation.

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I can assist you and your clients in setting up the required entity / entities and transferring the property into the entity. Please email me or call me about this if you have any questions or concerns.

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