This article examines the U.S. income, gift, and estate tax consequences to a foreign owner upon a sale or other disposition of U.S. real property, including a sale of real estate, sale of stock of a U.S. corporation, or a sale of a mortgage secured by U.S. real property.
In addition to (or sometimes in lieu of) rental income, many foreign investors hope to realize gain upon a disposition of U.S. real property. The Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”) dictates how gains are taxed from the disposition of United States Real Property Interests (“U.S.R.P.I.’s”). The law has a fairly extensive definition of U.S. real property for this purpose. Most significantly, the law provides for a withholding mechanism in most cases.
WHAT IS A U.S.R.P.I.?
A U.S.R.P.I. includes the following:
- Land, buildings, and other improvements;
- Growing crops and timber, mines, wells, and other natural deposits (but not severed or extracted products of the land);
- Tangible personal property associated with the use, improvement, and operation of real property such as:
- Mining equipment used to extract deposits from the ground,
- Farm machinery and draft animals on a farm,
- Equipment used in the growing and cutting of timber,
- Equipment used to prepare land and carry out construction, and
- Furniture in lodging facilities and offices.
- Direct or indirect rights to share in appreciation in value, gross or net proceeds, or profits from real property;
- Ownership interests other than an interest solely as a creditor, including:
- Fee ownership;
- Leasehold interest in real property;
- Time-sharing interest;
- Life estate, remainder, or reversionary interest; and
- Options, contracts, or rights of first refusal.