Introduction To Us Real Estate Legislation For Foreign Investors

There is legislation in place to administer all real estate transactions that take place on US territory

. However, it is actually not the bureaucratic nightmare that many people make it out to be.

The legislation is actually pretty straightforward for foreign investors, and not much different than it is for a citizen of the US. 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. It imposes an income tax on any US property sold by a foreigner.

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. Should a foreign investor choose to exchange their property for another piece of comparable US real estate, the gain would be deferred, and no FIRPTA income would be realized on 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. There are certain requirements that must be met for a 1031 to occur, and strict timelines to be kept, but it can be a nice way to simply transfer your investment, or vacation home to a new area in 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.

by: Martin Sejas

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