Foreign Investment in Real Property Tax Act and Withholding Requirements

The transferee must deduct and withhold a tax on the total amount realized by the foreign person on the disposition. The rate of withholding generally is 15%.

The amount realized is the sum of:

• The cash paid, or to be paid (principal only);
• The fair market value of other property transferred, or to be transferred; and
• The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.

If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 21% of the gain it recognizes on the distribution to its shareholders.

A domestic corporation must withhold tax on the fair market value of the property distributed to a foreign shareholder if:

• The shareholder's interest in the corporation is a U.S. real property interest, and
• The property distributed is either in redemption of stock or in liquidation of the corporation.

CALCULATING CAPITAL GAINS –

TAXABLE PROFIT

Tax is assessed on the profits know as capital gain which is the difference between the “tax basis” and the sales price( Sales price less Cost), adjusted for selling costs (commissions, excise taxes, escrow charges, etc.)  Under US regulations, the tax basis is the original purchase price, including acquisition costs and other legal expenses to perfect or defend title, plus any improvements (land, dwelling costs, outside of normal repairs) made to the property, including any utility service assessments.  Note that property taxes, mortgage interest, association dues are not included in the basis on non-income producing property.  If the property is, or was, a rental, then the basis will be adjusted for depreciation, and taxation may become more complex.

Additionally, if there is a capital gain on the sale of real property, then such gain will be subject to the Alternative Minimum Tax (AMT).

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OTHER RULES

Special Rules for Purchase of Resdence

A U.S. real property interest is acquired for use as a residence if you or a member of your family has definite plans to reside in the property for at least 50% of the number of dates the property is used by any person during each of the first two 12-month periods following the date of transfer. Do not take into account the number of days the property will be vacant in making this determination.

If the sales price does not exceed $1,000,000 and the buyer acquires the property for use as a residence, withholding is required at a reduced rate of 10%.

If the sales price does not exceed $300,000 and the buyer acquires the property for use as a residence, withholding is not required.

Buyer must sign an affidavit to establish a reduction or exclusion of withholding.

Sec 1031 Tax Free Exchange

There may be the opportunity for the seller to enter into a transaction where he/she would not recognize gain. Seek professional assistance.

Estate Taxes

Depending on how property is titled there may be a death tax. Seek professional assistance. 

Seek appropriate counsel or call Gidney & Co, CPA at (305) 866-6266. 

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