Many of the clients we work with at AG Tax own, or are thinking of owning, real property in the US. This could be a rental property, or even a business investment. Most people do not realize the complicated tax issues that might arise when they sell their US real property. Specifically, the Foreign Investment in Real Property Tax Act involves the taxation (by the US) of capital gains from the sale of a US property by a foreign person. In an effort to inform current and future clients, the specialists at AG Tax have put together an introduction to this piece of tax legislation. Let’s go over it now.
What is FIRPTA?
The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980 to ensure foreign investors paid a tax on gains from sale of American real estate. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests, which includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc.
It applies to entities and individuals, who hold direct or indirect interests in real property such as: interest in Radio and Broadcast Television, Aviation or Energy (mines, wells) sector, rental properties as well as certain personal property that is associated with the use of real property (such as farming machinery or hotel furniture).
In 2008, the IRS issued a notice that broadened the scope of FIRPTA. Under this notice, capital gains on these types of transactions, which up until this point were only taxed in the foreign country, would now be taxable in the US for the sale of US real property by a foreign investor.”
Generally, there are no restrictions in the purchase of U.S real estate property by a foreign entity, unless the buyer is from a country with which the U.S. has travel and trade restrictions or is at war. In fact, the inflow of capital is considered to be a welcome addition. Some states however limit foreign ownership of real property and have certain restrictions. Problems arise when the foreigner wishes to sell this property and is not aware of the applicable laws.
What are the Basic Tax Implications of FIRPTA?
Domestic persons purchasing U.S. real property interests from foreign persons are required to withhold 10% of the amount realized on the disposition while foreigners need to withhold a tax equal to 35% of the gain it recognizes on the distribution to its shareholders. This 10% or 35% is held as anticipated tax on the gross sales price, irrespective of a capital gain or loss!
Are There Exceptions to FIRPTA?
There are certain exceptions to FIRPTA withholding requirements which have been summarized below. Please keep in mind this is not an exhaustive list, and any FIRPTA planning should be done using a qualified tax advisor :
• If the property has been acquired and used for primary residential purposes at least 50% of the number of days the property has been owned.
• If the foreign person has not owned more than 5% of the fair market value of a class of stock for a corporation regularly traded on an established securities exchange in the last five years.
• The disposition is of an interest in a domestic corporation and that corporation furnishes you a certificate stating, under penalties of perjury, that the interest is not a U.S. real property interest.
• The transferor gives you a certification stating that under penalties of perjury the transferor is not a foreign person and contains the transferor’s name, home address, and US Taxpayer Identification Number.
• A withholding certificate is issued from the IRS that excuses withholding.
• The property is acquired by the United States Government, a U.S. state or possession, a political subdivision thereof, or the District of Columbia.
AG Tax LLP Can Help
FIRPTA can be the source of unforeseen issues and taxes in the buying and selling U.S. real property if not planned for accordingly. Knowing about FIRPTA in anticipation of a sale can help prevent problems that may arise during the actual real property sale. On the other hand not being prepared for the FIRPTA scenario can delay the property sale as well as have taxes withheld that may or may not be actually owed. AG tax specialists can assist you in planning the purchase of your investment in US real property to avoid FIRPTA headaches later on.
If you have any questions or concerns regarding FIRPTA, the proposed changes to FIRPTA, or simply general questions about investing in US real property, you should call an AG Tax advisor with your related queries. AG Tax professionals are well-versed with FIRPTA and the required compliance.
Additionally, if you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
As a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
