It’s no secret. There is and will continue to be a vast amount of foreign owned real property in the United States. And because of this, many investors involved in 1031 Exchanges have or will run across Foreign Investment in Real Property Tax Act (FIRPTA) issues.
In a nutshell when a foreign investor (individual/partnership/ corporation/trust/estate) sells their United States Real Property Interest (USRPI), the buyer must withhold up to 15% of the total amount realized from the sale and remit that amount to the Internal Revenue Service unless certain exemptions are met. FIRPTA was implemented to reduce the risk of foreign taxpayers selling their USRPI and avoiding paying capital gains tax.
1031 Exchanges and Foreign Investors
In order to defer capital gains taxes and other taxes that would normally be due upon the sale of real estate, foreign investors may utilize Section 1031 to exchange their U.S. real property for other U.S. property. FIRPTA just imposes additional requirements.
For example, John, a citizen of France, is planning to complete a 1031 Exchange with his USRPI. First, he sells his USRPI for $1,000,000, to Sarah. Under FIRPTA, Sarah would be required to withhold $150,000 at the closing and remit the monies to the IRS.
Due to the unpredictably
of the issuance of funds by the Internal Revenue Service, the $150,000
withheld may not be available to John when he is scheduled to complete
the purchase of his replacement property.
Here is a solution:
1.) File an 8288-B (“Application for Withholding Certificate for Dispositions be Foreign Persons of U.S. Real Property Interests”)
2.) Deposit additional funds with the Settlement Agent before the close of escrow
Impact on buyers of Foreign Investor owned real property
Buyers and their closing agents need to be aware of FIRPTA’s federal withholding requirements, specific timelines and exemptions. Failure to comply with FIRPTA could make those parties financially responsible for significant penalties.
Navigating around FIRPTA can often be the difference between a successful and unsuccessful 1031 Exchange. In regards to FIRPTA issues, sellers, buyers and closing agents should all consult with their tax and legal advisors. For any questions regarding 1031 Exchanges, please contact IPX1031.
It should be noted that there is currently a bipartisan effort in the US Congress to repeal FIRPTA. Although it has the support of many real estate groups, the process will probably take a considerable amount of time. We will provide an update, if and when it is appropriate.
For More Info: IPX1031 FIRPTA Issues in 1031 Exchanges
IRS Disaster Relief Updates
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Intermediary, you can be confident that your exchange will be handled
expertly and that your funds will be safe, secure, and available when
needed. Contact IPX1031 to discuss your 1031 Exchange solution.
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