Understanding FIRTPA
WHAT IS FIRPTA
FIRPTA
is an acronym for “Foreign Investment in Real Property Tax.” The law was established in 1980 to allow the government to collect taxes when theseller isn’t a U.S. citizen. For instance, sellers from the United States must paycapital gains taxes for any profitable real estate investment in the country.
However, because a foreign investor isn’t subject to the same tax laws as a United States citizen, the IRS shifts the obligation for collecting the tax to thebuyer. FIRPTA was designed to even the tax playing field for U.S. investors.
It’s always important to work with a title company that understands FIRPTA.
While the seller is officially responsible for the FIRPTA tax, it’s the buyer’s job to make sure the money is set aside. According to the IRS, the buyer is what’s known as the “withholding agent.”
How much should you set aside? Typically, 15-21% of the price of the transaction should be carved out for tax, depending on the price of the property and if the seller is an individual or a corporation. A corporate buyer or business buying aproperty is subject to the same rules.
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