The Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, is a federal law that applies to any disposition of real property by a foreign person. In general, FIRPTA requires that ten percent of the amount realized from the disposition of the property be withheld and remitted to the Internal Revenue Service after the closing on the property. Understanding how FIRTPA operates, when it applies, and what exceptions may be available is important for anyone involved in real property transactions.
The Foreign Investment Real Property Tax Act (FIRPTA) of 1980 was implemented to capture capital gains taxes from non resident aliens selling real property in the United States. If a foreign person or nonresident alien is a party to a 1031 exchange, FIRPTA reporting and withholding requirements must be examined. A foreign person includes a foreign corporation, foreign partnership, foreign trust or foreign estate, in addition to domestic partnerships, trusts, estates to foreign persons who are partners or beneficiaries to such partnerships, trusts or estates.
All states recognize the Federal 1031 exchange tax code permitting the deferral of capital gain at the state income tax level. Those states that do not observe the Federal statute require the Taxpayer pay a state income tax on the gain in addition to the potential of paying tax on the sale out of state replacement properties.
Foreign persons both individual and business entity can defer federal and state (dependent upon state) capital gains and recaptured depreciation by initiating a 1031 like kind exchange when selling either real and personal property held for investment or in a business. The process works just like a regular 1031 exchange except there are additional filing and reporting requirements.