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The United States has one of the most active real estate markets in the world, and it is important for any foreign investor to understand the tax implications of investing in the United States real estate market.
The United States normally taxes nonresident aliens and corporations on their United States Source Income and any Effectively Connected Income with a trade or business in the United States. Normally the sale of personal property (including stock in a corporation) by a nonresident is sourced outside of the United States under Code Sec. 865. Hypothetically, if it wasn’t for the Foreign Investment in Real Property Tax Act of 1980 rules (FIRPTA), a nonresident could sale stock in a corporation holding United States real property and such gain would be exempt from United States taxes.
The FIRPTA rules were passed to achieve parity in the tax treatment of gains and losses in real estate of United States and foreign investors. The FIRPTA rules treat any gains or losses of foreign investors from an Investment in United States Real Property (‘USRPI”) as if they are gains and losses connected with a trade or business in the United States, taxing such gains at the rates to which domestic investors are subject.
Under the FIRPTA rules, an USRPI includes an investment in a United States Real Property Holding Corporation (“USRPHC”), corporations in which the fair market value of USRPIs exceeds 50% of the fair market value of all assets. The FIRPTA rules are complex and purchasers may be required to withhold from the seller a certain percentage of the purchase at the time of the sale.
At Kaufman Accounting PC we have a team that helps clients navigate the complexity of the FIRPTA rules, determine whether withholding is required or exempted, and understand whether there are any tax planning opportunities when investing in United States real estate.