In 1980, Congress enacted the Foreign Investment in Real Property Tax Act (FIRPTA), 26 USCS 1445. The law states that if a seller of real property is a “foreign person,” the buyer must be taxed equal to the 10% of gross purchase price, unless exempted by law.

A “foreign person” is a nonresident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust, or estate. A resident alien is not considered a foreign person under the law.

Exemptions to FIRPTA

There are a number of exemptions to FIRPTA. A transaction is exempt if:

• the seller of real property provides a non-foreign affidavit establishing under penalty of perjury that the seller is not a foreign person
• the transaction involves the transfer of a property acquired for use as the buyer’s residence and the amount realized is not more than $300,000
• the seller obtains a “statement of qualification” from the Internal Revenue Service stating that withholding will not be required

Obtaining legal advice

In connection with any sale of real estate involving a foreign investor, the buyer and seller should consider making a specific agreement regarding FIRPTA compliance. The experience of a real estate attorney can be helpful in avoiding complications that might otherwise arise at the last minute and delay the closing. As always, when dealing with the Internal Revenue Service, it is important to proceed with the utmost caution, as “an ounce of prevention is worth a pound of cure.”