Acquiring or selling real property based in the United States opens foreign individuals to tax liability to the IRS. Before purchasing or selling a property, individuals should understand how the transaction would impact their obligation to file a tax return with the IRS.

These taxes are in addition to any property taxes. Local governments, not the IRS, manage property taxes.

In general, foreign buyers and sellers will have to file tax returns related to the purchase or sale of a property.

While the sale itself may not create any tax liability for the buyer, they may have other tax liabilities and may qualify for deductions.

Foreign Sellers

The IRS views property tax sales as a capital gain. This means that any profit a foreign buyer realizes on a sale must be taxed on profits earned.

If a foreign seller uses the sale's proceeds to purchase a similar property, they may be able to defer paying taxes on the capital gains. This is known as a 1031 Exchange.

FIRPTA

Under the Foreign Investment in Real Property Tax Act (FIRPTA), when a foreign individual sells real estate, 15 percent of the sale price must be withheld at closing. There are exceptions, however, such as properties intended as a primary residence.

The 15 percent withholding isn't the actual tax due but a way to ensure the seller follows U.S. tax laws. The foreign seller can file tax returns and may be entitled to a refund.

What is a TIN?

All foreign buyers and sellers must have a Taxpayer Identification Number (TIN). TINs are nine-digit numbers used by the IRS to identify taxpayers, and each TIN is unique.

For foreign buyers and sellers who are individuals, they will need to get an Individual Taxpayer Identification Number (ITIN). ITINs are available to individuals who don't qualify for a Social Security Number. Individuals can get an ITIN by completing Form W-7.

All forms submitted to the IRS must include a taxpayer's TIN.

If you have questions about tax issues for foreign individuals, 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.