The disposition of a U.S. real property interest by a foreign person, known as the transferor, is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). This law provides guidance on a non-citizen's disposition of a U.S. real property interest.

These dispositions are subject to income tax withholding. FIRPTA authorizes the IRS to withhold income tax when foreign persons dispose of U.S. real property interests.

What is a Disposition?

Disposition is an umbrella term for any transfer of a real property interest. The Internal Revenue Code defines sales, exchanges, liquidations, redemptions, gifts, and transfers as tips of dispositions.

What is a Real Property Interest?

FIRPTA defines a U.S. real property interest as a stake or ownership in real property located in the United States or the U.S. Virgin Islands. This can include an interest in a mine, well, or other natural deposit. It doesn't include any interest someone has as a creditor.

Personal property associated with the use of real property, such as farming machinery, may also be considered a real property interest for tax purposes.

Who is Subject to FIRPTA Withholding?

FIRPTA withholding applies when the seller of a real property interest based in the U.S. is a foreign individual. The property's buyer also has responsibilities under FIRPTA.

Any foreign national who is selling or disposing of a U.S. real property interest falls under FIRPTA. In general, the buyer of the property is the withholding agent, meaning the buyer, or transferee, is responsible for withholding the mandatory amount, either 10 or 15 percent.

If the buyer fails to withhold the tax, they may be liable for paying the tax.

When a property has multiple owners, the withholding amount is based on the foreign national's ownership percentage of the property at the time of the purchase. They are subject to FIRPTA withholding, but only to the extent of their share.

For example, a foreign national has a 20-percent stake in a commercial office building. When the building is sold for a gain of $1 million over the original purchase price, the buyer must withhold 15 percent of the foreign national's share of the gain. The foreign national's stake would be $200,000, which works out to $30,000 withheld.

If you have questions about FIRPTA withholding, 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.