What is the Foreign Real Property Tax Act
FIRPTA?

U.S. realtors and rental agents/property managers are encountering an increasing number of situations that involve foreign persons, defined as persons other than U.S. persons, acquiring U.S. real property. The tax rules governing disposition of any U.S. real property interest by foreign persons vary in many ways from those that apply to U.S. persons. Understanding the tax laws is critical for real estate professionals to avoid personal liability for improper U.S. federal income tax compliance.

The disposition of a U.S. real property interest by a foreign person (transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States for the first time to tax foreign persons on disposition of U.S. Real Property Interests (USRPI).

A USRPI includes any sale of an interest in parcels of real property, as well as sale of any shares in certain U.S. corporations that are considered U.S. real property holding corporations. Any purchaser (transferee) of a USRPI from a transferor must withhold ten percent (10%) of the amount realized and remit such amount to the IRS within 20 days of the date of transfer, using Form 8288 (PDF), and Form 8288-A (PDF).

The transferee of the property must determine if the transferor is a foreign person. If the transferor is a foreign person and withholding does not take place in accordance with the law, the transferee and the agent may be held liable for the tax.

There are exemptions to the withholding requirements of Internal Revenue Code section 1445. One of the most common exemptions to FIRPTA withholding is that the transferee does not have to withhold in a situation where the real property is purchased for use as a residence and the purchase price in not more than $300,000. A listing of the exemptions from FIRPTA withholding is in IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and at IRS.gov, using “FIRPTA” as a key search word.

In certain situations, such as when the tax due on the transferor’s gain from the sale is less than the withholding, the foreign transferor (or the transferee) can request from the IRS a reduction or elimination of withholding. The FIRPTA Withholding section on IRS.gov has more information about reducing the withholding rate.

Withholding on Rental Income paid to a Foreign Person

If a foreign person owns U.S. rental property and receives rental/investment income not connected with a U.S. business, the renter must withhold a flat rate of 30% (without deductions) of the rents, unless a tax treaty provides a lower rate or an exemption. Here are some basic rules regarding withholding on rent:

  • IRC section1441 provides for the withholding of tax paid by a withholding agent to a nonresident alien on various items of income, including rental income. The person paying rent, as well as the real property manager who collects rent on behalf of a foreign owner, are considered withholding agents.
  • The person making payment of U.S. source rents to a foreign person must withhold 30% unless the foreign person claims reduced withholding based on a tax treaty (W-8BEN) or makes an irrevocable election with the IRS to treat the income as effectively connected to a U.S. trade or business (W-8EIC).
  • Withholding agents must use Form 1042 and 1042S to report the tax withheld.
  • The requirement to withhold 30% extends to the manager of the rental property if the tenant has not met the 30% withholding. Property managers who do not comply with these rules will be held liable for 30% of gross rent, plus penalties and interest.

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