When a foreign national sells real property in the United States, the IRS must somehow collect taxes on any gain. However, the seller may not file a U.S. tax return, which means the IRS will need a different avenue for collecting taxes. That’s where FIRPTA comes in.
If a foreign investor is selling vacant land in the U.S., does that change their tax situation? In this article, we’ll get a quick intro to FIRPTA and how it applies to vacant land.
What is FIRPTA?
FIRPTA stands for the Foreign Investment in Real Property Tax Act. It is how the IRS collects taxes on real property gains when a foreign national is the seller. Given the complexity of dealing with a foreign country's tax code, the IRS bypasses this and requires withholding a flat tax based on the property's sale price. This rate can be up to 15% of the total amount realized from the sale. It is the buyer's responsibility to withhold the tax.
Once the foreign investor files a tax return, the IRS is able to determine if they paid more or less than what should have been paid. Any difference is settled up at that point through a refund from the IRS or additional payment from the foreign investor.
The sales price determines how much to withhold. If the sales price of the property is $300,000 or less, withholding is not required if the property will be used as a residence. If the sales price is between $300,000 and $1,000,000, and the buyer plans to use the property as a primary residence, the withholding amount is 10%. For sales prices above $1,000,000, the withholding amount is 15%.
Does FIRPTA Apply to Vacant Land?
How does FIRPTA view the sale of vacant land by a foreign investor? FIRPTA does not apply to vacant land, even if the buyer intends to build a residence on the property. But there are some restrictions for the buyer. The buyer must be an individual rather than a corporation, partnership, trust, or estate.
FIRPTA and 1031 Exchanges
Foreign investors can participate in a 1031 exchange, but there are certain restrictions to be aware of. In order for the sale of the relinquished property by a foreign investor to be exempt, the following must apply:
- The relinquished property’s closing must occur simultaneously with the replacement property’s purchase.
- The seller (i.e., foreign investor) must notify the buyer that the seller is not required to recognize a gain or a loss.
- Within 20 days, the buyer must provide a non-recognition notice to the IRS, confirming that the requirements have been satisfied.
- There can be no boot.
Foreign investors can also cover any withholding amount using out-of-pocket cash. Using personal cash will allow the full amount of cash from the sale to go toward the exchange.
Dealing with FIRPTA can be a little complex. It is best to work with your tax advisor before engaging in a foreign-related property transaction.