A purchaser of property from a foreign person or entity must comply with the provisions of the Federal Investment in Real Property Tax Act of 1980 (“FIRPTA”). Under FIRPTA the buyer must withhold ten percent (10%) of the amount realized by the foreign seller. The foreign seller is required to report the sale by filing the appropriate tax forms. If the buyer fails to withhold the required amount, then the buyer may be liable for the tax due from the transaction.
But FIRPTA applies to more than a fee title purchase transaction. FIRPTA applies to the disposition of a U.S. real property interest by a foreign person or entity. A real property interest includes not just the fee title but would also include the foreign person’s interest in an option to purchase, in a purchase agreement, in a right of first refusal or in a leasehold. Thus a person acquiring the foreign person’s interest in an option, for example, would need to comply with FIRPTA by withholding 10 percent of the amount realized by the foreign seller and the seller would be required to report the transaction by filing the appropriate tax forms.
Contact Frank Ravinal or Miriam Jaffe for real estate law questions.