The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) governs real property sales when a 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.

The IRS defines real property as land or improvements to land. FIRPTA's definition of real property includes that meaning but expands beyond traditional real estate sales.

For FIRPTA, a U.S. real property includes any real property located in the U.S. or the U.S. Virgin Islands. Mines, wells, and natural deposits fall under FIRPTA as well.

Where FIRPTA can get tricky is that it covers more than land and improvements to land. It also includes some types of personal property when that property is associated with the use of real estate. The example the IRS gives is farming machinery.

FIRPTA doesn't apply to any property interests when the foreign national is a creditor. However, certain types of interest in domestic corporations may also fall under FIRPTA's definition of real property.

Corporate Interests and FIRPTA

Interests in U.S. corporations, other than as a creditor, fall under FIRPTA. A foreign national can avoid FIRPTA if they can show that their interest in a corporation wasn't a U.S. real property interest during the applicable period, which is either the shorter of the period during which the foreign national held the interest or in the five years before the date of disposition.

To avoid FIRPTA on interests in corporations, a taxpayer must show all of the following:

• The corporation didn't hold any U.S. real property interests on the date of disposition.
• The corporation disposed of any U.S. real property interests that the corporation held at any point during the shorter of the applicable periods, and the full amount of any gain was recognized.

and

• The corporation or any predecessor wasn't a regulated investment company (RIC) or a real estate investment trust (REIT) during the shorter of the applicable periods during which the taxpayer held the interest.

For FIRPTA, real property covers not only land but also certain types of personal property and interests in corporations. Knowing when and how the sale of a U.S. real property interest triggers FIRPTA can have major tax implications for foreign nationals.

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.