FIRPTA – Foreign Investment in Real Property Tax Act

In an earlier post, we covered the intricacies of buying a property in NYC as a foreigner. As outlined, a few obstacles to foreign investment in NYC real estate exist. Unlike many famous cities in the U.S. and worldwide, there are no individual taxes levied on international buyers. However, this changes if you choose to sell or if you should pass away. If you’re excited about buying real estate, understanding the FIRPTA tax is critical.

What is the FIRPTA tax?

The Foreign Investment in Real Property Tax Act (FIRPTA); requires the seller to retain 15% of the gross purchase price from foreign investors who buy U.S. real property. Once the IRS has determined that you are current on all taxes owed to the U.S. government, they will be refunded. The costs of compiling with the FIRPTA can be substantial for foreign sellers. Once all legal, accounting and filing fees are added, you can find a five-figure USD bill. But with 15% of the gross sale price on the line, it would be worse not to.

However, some planning can reduce the FIRPTA withholding or even eliminate it. Foreign buyers should apply by filing for an 8288-B Application for Withholding Certificate. It will reduce the FIRPTA amount at the time of closing. Many things determine the amount it can be reduced, such as the original purchase price, length of ownership, capital improvements, closing costs, and the location of the seller’s residency. When scheduling a closing date for your sale, foreign buyers should remember that it takes approximately 90 days for the IRS; to process an application for a Withholding Certificate.

No withholding is required for U.S. citizens, permanent residents, and resident aliens.

You can be classified as a resident alien if you meet the physical presence test of being present in the U.S. for a minimum; of 183 days in the current calendar year. Or the substantial presence test of being present in the U.S. for 183 days over three years. No withholding is required for U.S. citizens, permanent residents, and resident aliens.

It’s also possible to avoid the FIRPTA Withholding if the property’s purchase price is under $300,000. The buyer has signed an affidavit stating they intend to use it as their primary residence.

What is the capital gains tax?

There is a State and Federal Capital Gains Tax on the net capital gains in NYC from foreign owner property sales. The Federal Capital Gains tax is 20%, while New York State imposes a non-resident gains tax of 8.82%. Your net capital gains are calculated by adding your original purchase price, closing costs for both purchase and sale, and the cost of any capital improvements together. This cost basis is then subtracted from your sale price.

What is the estate tax?

If the owner passes away and the property is valued at over $60,000, the Federal government and New York State impose an estate tax on the property’s value at the time of death. It can be very high for foreign owners, with a 40% tax by the Federal government and up to 16% tax by the State.

However, foreign buyers can minimize this income tax by structuring their U.S. holdings through a foreign trust or business such as a corporation or limited liability company.