Lawyers and Law

US Real Estate Legislation governs all real estate transactions in the US. Surprisingly, the ability to buy property in the US is not the bureaucratic nightmare that it is in some countries.

All in all, the legislation is fairly easy to understand for foreign investors and does not vary much with that for a US citizen. The only exception to all of this is what is known as FIRPTA.

FIRPTA stands for Foreign Investment in Real Property Tax Act (FIRPTA) and was passed in 1980. It deals with how gains are taxed when a non US citizen sells their piece of property.

Prior to 1980, there was really nothing in the US Real Estate Legislation that encouraged tax compliance when a foreigner sold property in the US. FIRPTA changed all that. This allows it to impose an income tax on US property sold by a foreign investor.

To ensure collection, it also requires the buyer to withhold 10% from the sale price and send it directly to the Internal Revenue Service, the governing tax body of the US. Some states, like California and Hawaii, also require a similar withholding tax.

This 10% is not the amount of tax due on the property. An advance payment to the government is required by FIRPTA. Once a tax return is filed for the year, and the final income tax is determined, the money is used toward the income tax due, and a refund is granted if necessary.

Nevertheless, just like with any other tax law, there are ways in which FIRPTA can be avoided. If a foreigner investor was to “exchange” their property for another similar piece of US real estate, then the gain would be deferred and there would be on FIRPTA income to come out of the sale.

This is called a 1031 exchange . A third party intermediary is required for this type of transaction and no proceeds may be received from the sale, no matter how small. A certain number of criteria must be met if you want a 1031 to take place as well as keeping strict timelines. All in all, it’s potentially a great way to transfer your investment to another part of the US.

While you may be looking to buy property in the US, not sell, you need to be aware of the implications of FIRPTA. The consequences are not immediate especially given that most foreigners hold property as a long term investment and this is not a strong enough reason for investors to leave the US market. It’s always wise to have a good understand of real estate legislation in the USA and to also develop an exit strategy just in case you need one in the future.