BDO USA: FIRPTA Rules Impact Investments in U.S. Real Property (December 2021)

BDO USA has published an article, “FIRPTA Rules Impact Investments in U.S. Real Property”, published on BDO USA. The abstract is as follows:

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980 to provide an exception to the capital gain sourcing rules with respect to foreign corporations’ or nonresident aliens’ gains on United States real property interests (USRPI). The FIRPTA withholding rules, which help enforce the taxation of the foreign investor’s gain from the disposition of an USRPI, have a significant impact on inbound investments in U.S. real property. This article provides a high-level overview of the FIRPTA rules as well as an overview of some exceptions to the FIRPTA rules.

FIRPTA Rules

Under Internal Revenue Code Section 897(a)(1), if a nonresident alien individual or a foreign corporation disposes of a USRPI, the gain or loss on that disposition will be treated as if it is effectively connected with a U.S. trade or business. A USRPI is defined in Section 897(c)(1)(A) as:

1.An interest in real property located in the United States or U.S. Virgin Islands; and

2.Any interest in a domestic corporation unless the taxpayer establishes that the corporation was not a U.S. Real Property Holding Corporation (USRPHC) during the shorter of the period in which the taxpayer held the interest or five-year period prior to the date of disposition (FIRPTA Period).

A USRPHC is defined in Section 897(c)(2) as any corporation if the fair market value of its USRPIs equals or exceeds 50% of the sum of the fair market value of its USRPIs, interests in real property located outside the United States, and any other of its assets which are used or held for use in a trade or business.

Generally, if a foreign person disposes of a USRPI, then the transferee is required to deduct and withhold 15% of the amount realized on the transaction under Section 1445(a). However, certain exceptions apply that could excuse a transaction from FIRPTA withholding. These exceptions are discussed in more detail below.

Click here to view BDO USA’s Summary of “FIRPTA Rules Impact Investments in U.S. Real Property.”

Posted by Bennett Mansour, Associate Editor, Wealth Strategies Journal.

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