The Foreign Investment In Real Property Tax Act (FIRPTA)

Canadians have a natural affinity for the warmth and fair weather of the US Sunbelt seeking temporary refuge from the long cold Canadian winters. Colloquially known as snowbirds, these cross-border adventurers flock annually to the US in hopes of staking out their own piece of warm paradise. With the recent collapse of the US housing market and near-parity of the Canadian dollar, thousands of Canadians buy and sell US real estate without fully understanding what exposure they may have to US tax authorities.

The Foreign Investment Real Property Tax Act (“FIRPTA”) is a law enacted in 1980 and provides that if the Seller of real estate located in the United States is a foreign person, the Buyer must withhold a tax equal to 10% of the gross purchase price (unless an exemption applies as described below) even in cases when no tax is owed. A foreign person is a non-resident alien individual; a foreign corporation not treated as a domestic corporation; or a foreign partnership, trust or estate. A resident alien (green card holder) is not considered a foreign person under FIRPTA. Additionally, many States have enacted their own versions of FIRPTA which mandates mandatory withholding, usually at lower rates. Although FIRPTA generally provides that 10% of the purchase price must be withheld, the amount withheld should not exceed the seller’s maximum tax liability. The seller, or buyer, can request the IRS to determine prior to sale the seller’s maximum tax liability with respect to the sale.

There are numerous exemptions to the FIRPTA requirements. The most common exemption is when the seller furnishes a non-foreign affidavit stating under penalty of perjury that the seller is not a foreign person. Another exemption is a sale of property purchased for use as the buyer’s residence and the amount realized does not exceed US$300,000. Under certain circumstances, a seller may obtain a “qualifying statement” from the IRS stating that no withholding is required. In all actuality, very few sales qualify for an exemption of any kind.

Generally, FIRPTA is important for everyone to understand, but it is of particular importance if you are a foreign national who owns property in the US; assuming you plan on selling the property in the future. It is safe to say that a majority of Canadians interested in or who have purchased US real estate are unaware of FIRPTA and what potential impact if may have on them when the time to sell arrives. While FIRPTA has no impact on the purchase of US real estate, it could certainly have an unwelcomed impact when it comes time to sell.