Foreign Investment in Real Property Tax Act (FIRPTA)

Quick Takeaways

FIRPTA, or the Foreign Investment in Real Property Tax Act, was enacted in 1980.
Foreign investors are given a Taxpayer Identification Number (TIN) to pay taxes or for withholding purposes on properties they sell in the U.S.
The PATH Act of 2015 changed the withholding rate of FIRPTA from 10% to 15% on properties that sold for more than $1 million, among many other provisions.

Source: New FIRPTA Regulations Conform and Update Changes from the PATH Actpdf (PricewaterhouseCoopers, Feb. 23, 2016)

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980, initially as a response by Congress to public concerns about increasing foreign ownership of farmland in the United States. The major purpose of FIRPTA was to establish equity of tax treatment of ownership in U.S. real property between foreign and domestic investors.

In the 116th Congress, a bill to repeal FIRPTA was introduced in the House of Representatives that attracted the support of many commercial real estate stakeholders in the country, as well as a high number of bipartisan cosponsors on the Ways and Means Committee. Proponents of this bill, the "Invest in America Act" (H.R. 2210), believed it would increase the amount of foreign capital invested in real estate in the U.S. and also create jobs.

No FIRPTA repeal bills have yet been introduced in the 118th Congress.

See References for more information.

Advocacy

What is the fundamental issue?

Before the enactment of FIRPTA, foreign investors were often able to avoid paying

U.S. capital gains tax on gains when they sold U.S. assets, such as real estate, stocks, bonds, and U.S. Treasury securities.

FIRPTA changed this for gains on real property held by foreign investors by requiring the buyer of such property to withhold a portion of the proceeds and remit it to the IRS as a proxy tax. If the foreign investor owed less than the amount withheld, he or she could file a tax return and claim a refund for the difference. FIRPTA thus helped to level the tax playing field between U.S. and foreign investors

In the 116th Congress, a bill to repeal FIRPTA was introduced in the House of Representatives that has attracted the support of many commercial real estate stakeholders in the country, as well as a high number of bipartisan cosponsors on the Ways and Means Committee. Proponents of this bill, the "Invest in America Act" (H.R. 2210), believed it would increase the amount of foreign capital invested in real estate in the U.S. and also create jobs.

No FIRPTA repeal bills have yet been introduced in the 118th Congress.

I am a real estate professional. What does FIRPTA mean for my business?

Some economists believe that FIRPTA has harmed the U.S. commercial real estate industry and held back economic growth. The United States trails other major industrial nations in the amount of commercial real estate investment from foreign sources. Moreover, the U.S. real estate sector enjoys just a fraction of the amount of foreign dollars invested into other parts of our economy, such as manufacturing and financial services. In a survey done in early 2014, three-quarters of foreign investors who responded indicated that FIRPTA relief or repeal would have a major or a positive effect on U.S. real estate investment activity. Repeal of FIRPTA thus may increase investment in U.S. commercial real estate, which in turn could have positive growth effects on residential real estate as well.

NAR Policy

NAR policy provides that "we believe all U.S. investors and foreign investors in U.S. real estate should be subject to similar sets of rules under the U.S. tax system. NAR is thus not supportive of repealing FIRPTA. However, NAR supports policies that improve reporting and disclosure requirements regarding foreign ownership of U.S. real estate by eliminating the compliance burden on buyers and placing it on sellers and/or their agents.

Legislative/Regulatory Status/Outlook

It is presently unclear if or when the Invest in America Act will be reintroduced in the current (118th Congress), or if there will be a legislative vehicle that could carry the bill to enactment.

NAR Committee:

Federal Taxation Committee

References

NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require the member's nar.realtor login.

FIRPTA Basics

Reporting and Paying Tax on U.S. Real Property Interests (Internal Revenue Service, Apr. 11, 2024)

“Two forms are generally used for reporting and paying the tax required to be withheld on the dispositions of U.S. real property interests by foreign persons to the IRS: Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

Buyers (transferees), who are generally the withholding agents, must use Forms 8288 and 8288-A to report and pay to the IRS any tax withheld on the acquisition of U.S. real property interests from foreign persons. These forms must also be used by corporations, partnerships, estates, and trusts that must withhold tax on distributions and other transactions involving U.S. real property interests.”

FIRPTA Withholding (Internal Revenue Service, Sep. 27, 2022)

“The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.” The IRS explains the definitions and common terms in FIRPTA transactions, the rates of withholding, and answers 19 frequently asked questions about FIRPTA withholding situations.

ITIN Guidance for Foreign Property Buyers/Sellers (Internal Revenue Service, Jan. 4, 2024)

“Foreign sellers of U.S. real property interests need Taxpayer Identification Numbers (TINs) to request reduced tax withholding when disposing of the property interest, and to pay any required withholding. Individuals who do not qualify for Social Security numbers (SSN) may obtain Individual Taxpayer Identification Numbers (ITINs) to meet the requirement to supply a TIN.” This guidance from the IRS explains when ITINs are required for withholding and reduced withholding according to FIRPTA.

Exceptions from FIRPTA Withholding (Internal Revenue Service, Oct. 18, 2023)

Guidance from the IRS on circumstances when FIRPTA withholding is not required. The IRS explains the situations where FIRPTA withholding is not required and then explains the certification process for three of the situations. The final discussion is about the liability of the agent or the qualified substitute in FIRPTA withholding scenarios.

Definitions of Terms and Procedures Unique to FIRPTA (Internal Revenue Service, Oct. 17, 2023)

The IRS defines and explains terms and procedures that are specific to FIRPTA, including: dispositions, corporations, partnerships, trusts and estates, US real property interest, foreign person, transferor, transferee, amount realized, US Real Property Holding Corporation (USRPHC).

To Withhold, or Not to Withhold, That Is the Question: A Step-by-Step Approach to the FIRPTA Income Tax Withholding (Florida Bar Journal, Apr. 2018) E

“Under FIRPTA, a foreign seller of U.S. real property is subject to a tax withholding at closing, and the buyer in such transaction is obligated to submit the tax withholding to the IRS.4 This article provides a brief history of FIRPTA and lists the different types of sellers involved in transactions. Further- more, it guides the reader through a step-by-step approach in determining 1) whether the seller is a U.S. person or foreign person (be it an individual, limited liability company, corporation, partnership, or trust); 2) whether the FIRPTA with- holding applies to a given transaction or if it falls under an exception; and 3) what is the amount of the tax withholding. To help guide real estate practitioners through the analysis, included is a FIRPTA paradigm (decision matrix) divided into Part A — Seller Analysis and Part B — Residential Exceptions.”

PATH Act of 2015

Complying with the Foreign Investment in Real Property Tax Act (FIRPTA)pdf (National Association of REALTORS®, Apr. 12, 2016)

A series of questions and answers with Linda Monaco, a Legal Education Attorney, about provisions in the 2016 Protecting American Taxpayers from Tax Hikes (PATH) Act that affect FIRPTA. The changes were estimated to boost foreign investment in US commercial real estate, but part of the package increased the FIRPTA tax rate from 10% to 15% and “property acquired from foreign persons that is to be used as a personal residence is exempt from the increase if the sales price does not exceed $1 million.”

Webinar: Changes to the Foreign Investment in Real Property Tax Act (FIRPTA) (National Association of REALTORS®, Apr. 12, 2016)

“The Protecting American Taxpayers from Tax Hikes Act (PATH), enacted in December 2015, included several important changes to the Foreign Investment in Real Property Tax Act. The Path Act changes mean more foreign investment in U.S. real estate but also some compliance headaches. FIRPTA imposes a withholding tax on foreign persons disposing of real property in the U.S. This webinar will explain the reasons behind the changes and teach everything you need to know about complying with the new rules. Experts will discuss recent changes to FIRPTA made by Congress, the tax implications for residential and commercial buyers and sellers, and practical "nuts and bolts" information about how to comply.”

New FIRPTA Regulations Conform and Update Changes From the PATH Actpdf (PricewaterhouseCoopers, Feb. 23, 2016)

“The Treasury and IRS issued temporary and final regulations on February 17, 2016, that generally conform and update the existing regulations to changes made to the Foreign Investment in Real Property Tax Act (FIRPTA) by H.R. 2029, (herein ‘the PATH Act’). The PATH Act was signed into law on December 18, 2015. The PATH Act: (I) increased the general rate of withholding on dispositions of US Real Property Interests (USRPIs) from 10% to 15%, (ii) exempted certain foreign retirement funds from the application of FIRPTA, (iii) increased the amount of stock a foreign person may own in a publicly traded real estate investment trust (REIT) from 5% to 10%, (iv) added a new exception for qualified shareholders in REITs, and (v) modified the ’cleansing rule’ and the definition of a ‘domestically controlled’ qualified investment entity.”

Foreign Investment in Real Property Tax Act (FIRPTA)

Quick Takeaways

Advocacy

What is the fundamental issue?

I am a real estate professional. What does FIRPTA mean for my business?

NAR Policy

Legislative/Regulatory Status/Outlook

NAR Committee:

Current Legislation/Regulation (bill number or regulation)

In-Depth

Legislative Contact(s):

Regulatory Contact(s):

References

FIRPTA Basics

PATH Act of 2015

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