PEKIN, ILLINOIS – The U.S. real estate market remains a magnet for offshore investors while figures of the first half in 2017 show the country continues to lead the recipient of cross-border capital, attracting $19.8 billion of foreign investment. And while the Local Records Office recognizes that investors from outside the United States are considering properties or ventures in Illinois, for example, in the Pekin area investors can participate in a new residential and commercial development of purchasing distressed properties with the goals of rehabilitating and selling them, or acquiring properties for rental, the Local Records Office indicates that property buyers and sellers must be aware of the certain legal requirements, including the federal tax laws that are specifically designed for foreign investors.
FIRPTA –was passed was part of a massive budget bill and became law on December 5, 1980. A spending bill was then enacted in 2015 that made numerous changes going forward. Under the Internal Revenue Code (IRC), nearly all income is subject to a federal taxation to some extent, whereas buyers of real property interests from foreign sellers individuals and corporations are held responsible for withholding taxes owed on the gain. The amount that must be withheld equals 15% of the realized gain. The buyer is then required to file a form with the IRS about the withholding. A buyer who fails to withhold taxes as required by FIRPTA may be held liable for the tax payment themselves.
When purchasing a property from a foreign owner, here are some things you should know:
-The Foreign Investment in Real Property Tax Act of 1980, also known as FIRPTA, may apply to your purchase.
-FIRPTA is a tax law that imposes U.S. income tax on foreign persons selling U.S. real estate.
-Under FIRPTA, if you buy U.S. real estate from a foreign person, you may be required to withhold 10% of the amount realized from the sale.
-The amount realized is normally the purchase price.
-The withholding is how we collect U.S. tax owed by foreign sellers.
Here’s how FIRPTA works –if the law applies to your purchase, within 20 days of the sale, you are required to file Form 8288 with the IRS. And along with the form, you must submit 10% withholding.
To learn more about FIRPTA, including whether the law applies to your purchase, visit www.irs.gov and type FIRPTA into the search field.
You can get a copy of Form 8288 on IRS site at the Forms and Publication page.
Under the Internal Revenue Tax Code (IRC), nearly all income is subject to a federal taxation to some extent. “Gross income” by the IRC’s definition, includes “gains derived from dealings in property.” When the amount of the proceeds from the sale of the property exceeds the amount the seller puts into the property, also known as “basis”, would then become taxable gains.
“Recognized gain” refers to the difference in sales price and basis, and “realized gain” refers to the amount of money a seller makes on the sale, which may include of forms of income or expenses. The IRC states all gains from a sale of a property must be recognized unless a statute specifically provides otherwise.
In Section 897(c)(1)(A) of the IRC, defines the types of “real property interests” that are subject to the FIRPTA’s withholding provisions. These also include ownership interests in real property located in any of the 50 U.S. states, the District of Columbia, and the U.S. Virgin Islands, including ownership interests—i.e., shares—in the U.S.-based corporations and own real property interests, with some exceptions. These types of properties involved in the most common real estate investments would then fall under FIRPTA’s definition.
And for a “nonresident alien individual” selling a U.S. real property interest, FIRPTA imposes the same tax for a foreigner “engaged in a trade or business within the United States,” which is found in IRC § 871(b)(1). This amount of tax may consist of capital gains tax payable by either the individual or the alternative minimum tax.
FIRPTA imposes taxes on foreign corporations for any sales of U.S. real property interests according to § 882(a)(1) of the IRC, including the regular corporate tax rate, the alternative minimum tax or the alternative tax for corporate capital gains.