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Model FIRPTA Provisions

FIRPTA

Foreign investment in real property tax act states that foreign persons disposing the US real property interests are liable to an income tax. Whereas, the residents of the US are also liable to pay tax upon disposition of interests but it’s been cut from their regular income tax. The purchasers/buyers of these real estate interests are to withhold the standard 10% of the payment received.  US real property interest means an interest in real property located in the United States. It also includes sales of shares and holding corporations. The model FIRPTA provisions can be explained as follows:

            If the seller is a foreign person, the standard withholding amount of 10% can be changed to 15%. Withholding is not required when the purchaser receives a statement from the seller explaining that he is not a foreign person and also upon acquisition of shares of a publicly traded corporation. This withholding amount can be brought down after the certification from the IRS (INTERNAL REVENUE SERVICES). The exception rule is that the purchaser is not required to withhold tax if the real estate in question is used as his home (personal use) and if the purchase price of the property is not more than $300,000.

In case the transferee is not a foreign person, the same is to be disclosed to the IRS.  The PATH act, 2016, amended the laws. These will be effective after 14th of February, 2016.

 

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