Buyer Beware the Foreign Investment in Real Property Tax

With property dispositions, transferees generally assume the tax liability and the transferor usually is responsibile for reporting the transaction. When acquiring assets from a "foreign person," those guidelines become flipped and somewhat counterintuitive: domestic purchasers must consider the US withholding tax requirements. More specifically, when a "foreign person" disposes of US real property, the transaction is generally subject to income tax withholding under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Under FIRPTA, the buyer is the withholding agent. Therefore, any purchaser of a "US real property interest" must ascertain whether the transferor is a "foreign person." If so, the purchaser must withhold and remit the tax, and complete the necessary forms with the IRS.