FIRPTA Withholding

Chris Wittich

It’s FBAR season, all the cool kids know that, but for some foreign taxpayers they are also experiencing a strange sensation called FIRPTA.  Of course FIRPTA stands for something; it’s the Foreign Investment in Real Property Tax Act of 1980.  It has been around for a long time, but as foreign investment in the US has increased it has become more important.

As the name suggests, the act relates to foreign people investing in real property that is in the US.  So the example starts with a Canadian citizen that buys a vacation home in Florida, or California, or Minneapolis.  Alright it seems unlikely a Canadian would buy a vacation home in Minneapolis, but the point is anywhere in the US.  So a Canadian person buys a house for $100,000, spends part of their winters living in it, then decides to sell.  They sell the house for a cool $100,000 so they have no gain or loss on the sale of the house.

Sounds like they should have zero tax liability since there was no gain or loss and you would be correct.  So then what is the point of this example?  Well the FIRPTA rules kick in and 10% of the sale proceeds are withheld and submitted to the IRS.  That certainly doesn’t seem real fair.  The Canadian just sold it for $100,000 but they only netted $90,000 in cash.  To retrieve the other $10,000 they will need to file a tax return showing the zero tax liability and the $10,000 of withholding.  To file a tax return they will need to do a W-7 ITIN application.  If it seems like a lot of work and hassle to get back the $10,000, I would agree, but it’s probably less than $10,000 of hassle.

As with any US tax law, there are a few exceptions to the FIRPTA withholding so it’s important to consult a tax professional.  But be aware that investing in US real property can have some administrative challenges you didn’t foresee.


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