The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) governs property sales when the seller is a foreign national. In general, any sale that falls under FIRPTA requires withholding of 10 or 15 percent of the gains from the sale.

FIRPTA applies even when a foreign person shares ownership of or an interest in a U.S.-based property with a U.S. citizen. FIRPTA has rules for general shared property interests as well as specific rules for U.S. citizen spouses.

Foreign Person and U.S. Citizen Co-Owners

When a U.S. real property interest has multiple owners and at least one of those owners is a foreign person, FIRPTA applies. The entire amount of gain realized from the sale, however, isn't subject to FIRPTA withholding.

The Internal Revenue Code lays out how to determine the amount subject to withholding by following these steps:

• The owners allocate the gain realized from the sale based on their capital contributions to the U.S. real property interest.

o   For example, a foreign owner contributed 25 percent to the initial purchase of the property. When the ownership group sells the property, they realized a gain of $1 million. The foreign owner collects $250,000 from the sale.

• The buyer withholds the total amount allocated to the foreign owner.        

o   Using the above example, the buyer will withhold $250,000 following the sale.

• In cases when multiple foreign persons have an interest in a property, how much credit is allocated to each foreign owner depends on any existing agreement. Foreign persons must request that the withholding be credited within the first ten days after the date of transfer.

o   Without any agreement, the credit will be evenly divided among the foreign owners.

Foreign Person and U.S. Citizen Spouse

When a foreign person is married to a U.S. citizen and they own property in the U.S., FIRPTA still applies. The couple cannot allocate the entire gain to the U.S. citizen spouse to circumvent FIRPTA.

The above steps still apply. For spouses, they are considered to have each contributed 50 percent. In other words, in the case of a $1 million gain, $500,000 is earmarked as the foreign spouse's gain and will be subject to FIRPTA withholding.

In some cases, exceptions may apply that reduce or eliminate FIRPTA withholding. An experienced tax attorney can help foreign taxpayers determine their tax liability.

If you have questions about FIRPTA, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.