FIRPTA: United States Resident, Foreign Person or “Disregarded Entity”?

Upon arriving at a piece of real property, a prospective buyer or real estate agent is usually on the look-out for hidden liabilities. One hidden tax liability could involve the Foreign Investment Real Property Tax Act (“FIRPTA”). An unfamiliar concept to many, tax liability arising under FIRPTA could put the purchaser on the hook for the seller’s real estate capital gains.

The FIRPTA tax, which taxes a foreign person’s disposition of real property, was designed to address widespread concern that foreign investors were purchasing United States real property and selling it at a profit, but not paying any tax. Generally, under FIRPTA, a transferee, who is often the purchaser, must withhold 15% of the total amount realized when purchasing United States real property from “foreign persons.” The IRC defines “foreign person” to include a nonresident alien individual, a foreign corporation, a foreign trust, a foreign partnership, a foreign estate, and any other person that is not a U.S. person as defined by the IRC.

If the seller is an individual, IRC Section 7701 provides various technical definitions for when a “nonresident alien individual” becomes a “residential alien individual,” making FIRPTA inapplicable. If the seller is a single-member limited liability company (“SMLLC”) organized in the United States, which is owned by a “foreign person,” the residency status of the SMLLC is “disregarded.” The seller is deemed to be the SMLLC owner, potentially subjecting the sale to FIRPTA. Under the IRC Treasury Regulations, there are various seller entities that are considered “disregarded entities.”

A certificate of non-foreign status provides the purchaser the requisite information to determine the seller’s residency status and whether funds need to be withheld to satisfy FIRPTA. In the above SMLLC scenario, a United States “disregarded entity” cannot provide a certificate of non-foreign status. The certificate of non-foreign status is required to state that the entity is not a disregarded entity, evidenced by a United States employer identification number. An individual transferor may also provide a certificate of non-foreign status, whereby the individual certifies he or she is not a nonresidential alien, and provides their Unites States taxpayer identification number, which is often their Social Security number.

Mischaracterizing a seller’s legal status under the IRC may create liability for the purchaser or their designated agent(s). A simple request by the purchaser or their agent of a notarized certificate of non-foreign status when purchasing real property will allow the purchasing party the ability to discover the FIRPTA implication, and its tax implications.

 

 

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