During the real estate hey days of the early 2000’s, many foreign residents made their way to the US to see if they could get in on the rising market fever. Vacationing in the United States and reconnecting with family, it became attractive to acquire a piece of the rock on this side of the pond. Well, the global economy is wreaking havoc on foreign investors as they try to cash out.
The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 was enacted to strongly encourage compliance with US tax law. Until FIRPTA was enacted, it was possible for foreigners to buy US property, make a profit upon sale and repatriate their profits back to their native country and pay no US tax. Collection is enforced by a system of withholding at sale of 10% of the gross sales price, regardless of gain or loss. Any tax withheld is then credited against any tax shown due on a subsequent tax return, payable at US tax rates.
There are few exceptions to the rule, here are the highlights: 1) if the real property was purchased as a primary residence for less than $300,000, it is exempt, 2) if the sale results in no proceeds, as in a gift transfer, it is exempt, 3) if the sale of investment property is facilitated as a Section 1031 and the US property is replaced with US property, then the tax is deferred until such time as a “cash out” sale triggers the tax.
The duty to file the 10% tax upon sale rests with the buyer of the property. The buyer must report and pay over the withheld tax to the IRS by the 20th day following the date of transfer along with IRS From #8288 and Form #8288-A. Failure to report will result in liability for the tax, interest and penalties. Know the facts and be prepared in every sale.
