Foreign Investment in Real Property Tax Act

The United States tax law requires all people, whether foreign or domestic, to pay income tax on dispositions of interests in U.S. real estate (U.S. real property interests). Domestic persons are subject to this tax as part of their regular income tax. Internal Revenue Code sections 897 and 6039C were enacted in FIRPTA; the Act also made conforming amendments to other various provisions of the Internal Revenue Code.

Internal Revenue Code section 897, as enacted by FIRPTA, treats the gain on a disposition of an interest in US real property as effectively connected income subject to regular federal income tax.

To ensure tax collection from foreign taxpayers, FIRPTA requires U.S. real property interest buyers to withhold 15% of the sales price. The seller may apply to the Internal Revenue Service (IRS) to reduce this 15% to the amount of tax estimated to be due. The IRS routinely and quickly approves such seller applications.

FIRPTA applies in virtually all cases where a foreign owner of a U.S. real property interest disposes of that interest. Provisions of the law preventing recognition of gain generally do not apply unless the seller receives a U.S. real property interest in a qualifying nonrecognition exchange.

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