Real Estate Taxes for Foreign Investors

Taxes for Foreign Investors in South Florida

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) is a United States tax law that imposes income tax on foreign persons disposing of United States real property interests. Tax is imposed at regular tax rates for the type of taxpayer on the amount of gain considered recognized. Purchasers of real property interests are required to withhold tax on payment for the property. Withholding may be reduced from the standard 10% to an amount that will cover the tax liability, upon application in advance of sale to the Internal Revenue Service. FIRPTA overrides most nonrecognition provisions as well as those remaining tax treaties that provide exemption from tax for such gains. Who is subject to FIRPTA? FIRPTA tax is imposed on nonresident alien individuals and foreign corporations.  A foreign person's gains from dispositions of their U.S. property are subject to income tax under FIRPTA at the same graduated rates applicable to U.S. persons.

Real Estate Tax Rates of Withholding

The transferee must deduct and withhold a tax equal to 10% (or other amount) of the total amount realized by the foreign person on the disposition. The amount realized is the sum of the cash paid, or to be paid (principal only), the fair market value of other property transferred, or to be transferred, and the amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer. The amount realized is generally the amount paid for the property. If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.

Individual Capital Gain Tax Rates: If the investor is a nonresident individual and the real estate qualifies for capital gain treatment, the net capital gain income will generally be subject to a tax rate of approximately 15%.

Corporate Capital Gain Tax Rates: If the investor is a foreign corporation and the real estate qualifies for capital gain treatment, the net capital gain income is currently subject to a possible tax rate in excess of 35%.

Ten Percent Withholding Tax: When FIRPTA applies, the transferee of the U.S. property must deduct and withhold 10% of the "amount realized" by the foreign seller. The amount of the seller's gain actual gain on the sale is irrelevant. The “amount realized” is usually the sales price for the property and includes the cash paid to the seller, the fair market value of any other property transferred by the buyer to the seller, and the outstanding amount of any liabilities paidoff. This withholding tax is treated as an advance payment against the actual Individual or Corporate capital gains tax discussed above.

Withholding Tax Not Final Obligation: The 10% withholding tax imposed on the foreign seller of a U.S. property is not the amount of tax actually due. It is merely an advance payment toward the foreign seller’s U.S. income tax obligation arising from the sale of the property. The foreign seller must file a U.S. income tax return for the year of the sale by the applicable filing deadline.