Foreign Investment in Real Property Tax Act - Overview

Overview

United States tax law requires that all persons, whether foreign or domestic, must pay income tax on dispositions of interests in U.S. real estate (U.S. real property interests). Domestic persons are subject to this tax as part of their regular income tax. Internal Revenue Code sections 897 and 6039C were enacted in FIRPTA; the Act also made conforming amendments to various other provisions of the Internal Revenue Code.

Foreign persons are taxed only on certain items of income, including effectively connected income and certain U.S. source income. Foreign persons, however, are not taxed on most capital gains. Internal Revenue Code section 897, as enacted by FIRPTA, treats the gain on a disposition of an interest in United States real property as effectively connected income subject to regular federal income tax.

To ensure tax collection from foreign taxpayers, FIRPTA requires buyers of U.S. real property interests to withhold 10% of the sales price. The seller may apply to the Internal Revenue Service (IRS) to reduce this 10% to the amount of tax estimated to be due. The IRS routinely and quickly approves such seller applications.

FIRPTA applies in virtually all cases where a foreign owner of a U.S. real property interest disposes of that interest. Provisions of the law which would prevent recognition of gain generally do not apply unless the seller receives a U.S. real property interest in a qualifying nonrecognition exchange.