The Foreign Investment in U.S. Real Property Tax Act of 1980
Prior to 1980 no FIRPTA withholding or tax on Foreigners selling US properties.
This was inconsistent with the income and capital gains treatment of US persons and entities in the same situation. Unfair to them but mostly unfair to the US Treasury who was not receiving their tax dollars from foreigners selling US real property.
1980 The US Congress creates FIRPTA, the Foreign Investment in Real Property Tax Act. The idea was to encourage increased investment by foreigners in US Real Property and open the floodgates of foreign investment and tax revenue.
But it didn't work! From its creation in 1980 until practical reporting methods were created in 1984 (see below), FIRPTA was a great concept but its implementation was cumbersome, poorly structured and served to create more problems than solutions.
The Good:
Foreigners pay taxes on US Real Property interests (USRPI) and Effectively Connected income (ECI) of that trade and business, as well as on Fixed, Determinable, Annual or Periodical Income (FDAP) which includes gains other than from sale of USRPI, items excludable from gross income (like tax exempts and scholarships) and securities trades through a US Broker.
IRS Code 897: treated gain or loss on disposition of USRPI as ECI - TAXABLE
IRS Code 6039(c): Required foreigners to disclose ownership of USRPI
The Bad:
Required mandatory reporting after the fact, when foreigners already got paid. IRS realized chasing down Foreigners after they were already paid for taxes was futile.
1984 Congress empowered FIRPTA with creation of the Deficit Reduction Act
Now FIRPTA worked! The main fix: Withholding more than the tax!
IRS Code 1445: Required foreigners to disclose ownership of USRPI
Buyer/transferee required to withhold (( TransferEE pays))
10% of amount realized by foreign persons on disposition of USRPI, or
35% of the gain on certain dispositions of USRPI
2015 Congress enacted the PATH Act of 2015, making important changes to FIRPTA.
Individual Taxpayer Identification Number changes and renewals
Every Foreigner needs and ITIN to file with the IRS.
Before PATH Act, ITIN only issued once.
Beginning 10/2016 ITINs must be renewed every 3 years
IRS Certified Acceptance Agents (CAAs)
Qualified and certified by the IRS
To facilitate the ITIN application process.
Certified to reviews ITIN application documents and authenticate identity to the IRS
Withholding Rate Increases
Before PATH Act, rate was 10%.
Withholding rate is now 15%
Retains previous 10% applicable now to one exception:
Personal residence $300k to $1mm, withholding is 10%
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