Foreign Investment in Real Property Tax Act – (“FIRPTA”)

Foreign Investment in Real Property Tax Act – (“FIRPTA”)


The US tax department provides specific regulations for foreigners who sell a property in the United States. At the time of sale, the buyer is required to withhold and subsequently pay the Internal Revenue Service (IRS) a sum equal to 15% of the purchase price of the property as a preventive payment of the taxes owed by the seller on the gain made from the sale.
The aim of the legislator was to withdraw a sum on the profits deriving from a real estate operation, as if the tax payer were engaged in a commercial activity in the United States and were producing a profit that must be taxed. Given the evident difficulty for the Internal Revenue Service (IRS) to demand tax compliance by foreign persons, the FIRPTA tax was created with a withholding tax system calculated on the total amount realized but then subsequently obtaining a reimbursement for undue amounts. The retained percentage stands at 15% of the amount made.
For example, if an Italian citizen has purchased an apartment in Los Angeles for $ 800,000.00 in 2016 and decides to resell it after 2 years for $ 1,000,000.00, the buyer will be required to withhold $ 150,000.00 at the source and remit this amount to the IRS as estimated taxes on the salary that the seller obtained from the sale of the property. In the specific case, the taxes that the seller would have to pay on the gains made from the sale are around $ 60,000.00. However, if the Italian citizen had set up a domestic company (an LLC, for example), and for his via he had bought , managed and resold the property, it would not have been subject to withholding tax at the time of resale and would also have enjoyed other advantages in the ordinary management of the property.
The example above deals with one of the most common situations common, but the cases are multiple and specific, and must be analyzed individually. In fact, much more disadvantageous situations may arise: consider the case in which, with reference to the previous example, the property had been resold at the same purchase price; therefore, no amount of tax would have been payable by our Italian citizen, who would however have retained the 15% deduction. Still another case if the object of the investment had concerned the sale of shares and not of a property, it would have been appropriate to adopt other solutions. It goes without saying that such taxation, especially when applied to large investment projects, can have a substantial economic impact on the respective rate of return.


The application of this regulation requires the presence of the following conditions: i) The tax applies when the transferor of the transfer is a foreign entity. Being in possession of a simple visa is not enough to elect the subject to an American citizen. In this regard it is necessary to be in possession of at least a Green Card. However, if you have resided in the United States for more than 183 days in the previous three years (calculated with specific coefficients year by year) starting from the date of disposition of interest, then from a fiscal point of view we saw ourselves as a US resident. ii) With reference to the transfer (which constitutes the cause of the withholding tax), the legislation speaks of disposition of the interest, therefore the gains deriving not only from the sale (for example of an apartment) but also from the exchange, from the liquidation of a company, from donations and from inheritances and any other purpose contemplated by Title 26 of the US Code. The FIRPTA tax law speaks of the disposition of a US real estate interest (U.S. Real Property Interest - USRPI). This definition includes: All interests, other than those deriving from the simple position of creditor, in any American society that falls within the definition of U.S. Real Property Holding Corporation (USRPHC) or returned to it in the 5 years preceding the provision, or in a real property referred to in point iii). A corporation falls into this category if the market value of the US real estate assets in that company exceeds 50% of the market value of all the tangible assets held by that company). Furthermore, in the absence of a declaration by the foreign party stating the contrary, the company is presumed to be a USRPHC. ii) Real estate (land, buildings), but also mines, springs, or other natural deposits, located in the US and the Virgin Islands, as well as other assets associated with the use of the buildings themselves (for example, agricultural machinery , the fruits of the earth, or the furniture of a hotel). However, there are two cases in which the interest is not considered a USRI: shares of joint-stock companies, partnerships and trusts that are publicly traded and the participation is less than 5%, or in the case of investments in a Real Estate Investments Trust. It should be pointed out that when we speak of interest we do not mean the transfer of property rights only, but also other real rights, or option rights.


The reasons why the withholding tax of 5% may not be due mainly revolve around the three points indicated above and the possibility of their certification: when one of these does not occur, then the FIRPTA does not apply to the transfer.


In general, the person who pays an amount to the foreign subject in return for a transfer is responsible for making the deduction. Sometimes, as already mentioned, the parties are mediated in the transfer through an agent, for which the limits of his responsibility vary according to the role played and the services rendered in the conclusion of the negotiation; the presence of a figure by expert is advisable in order not to run into errors and the consequent pecuniary penalties provided for by the United States tax system.
Instead, in the case of a domestic company which disposes in favor of a foreign shareholder, if the interest of the shareholder in the company falls under the aforementioned definition of real US interest, and is the result either of the redemption of shares or the liquidation of the company, the company itself must withhold a tax equal to 10% of the market value of the asset sold by way of withholding tax.


In conclusion, the obligation to effect the withholding is charged only on the recipient of the transfer, or equally on the person making the payment, at least, that the figure of agent as an intermediary is not present. The amounts not due and paid as tax (FIRPTA) can be recovered by the transferor only in place of the fiscal obligations on the annual general income; the foreign subject can obtain compensation or reimbursement depending on the case.