You clearly understand the need of good tax advisors in lawyers and accountants to mitigate this liability. Most foreign investors do this through establishing a privately owned (i.e. not publicly traded or registered) REIT that is domestically controlled, which exempts FIRPTA as long as on disposition, the sale is of the REIT stock rather than the asset. This is the most common structure and one that is time and IRS tested but one that requires a domestic US company and US taxpayer to own at least 51%, making it domestically controlled. In addition, at formation and going forward, the REIT must continuously meet all compliance requirements to maintain its REIT corporate and tax status.
How do we avoid FIRPTA with a U.S. entity?
We have been buying and selling overseas real estate for more than 10 years. Most of our activity has been in Australia and Asia. We are considering diving into the U.S. market and are aware that we could face taxation under the rules of FIRPTA. In our experience, we have found that good lawyering and entity structure can be of use in situations like this. Is there a way to form or structure U.S. entities to avoid FIRPTA?
Tax advice is crafted for the individual or entity, and wholesale tax advice is not worth the paper it is written on. The one general rule is that if you own 5 percent or less of a public REIT, you will not have FIRPTA tax on the sale. A good tax person can formulate a structure that can optimize your taxable income, and the structure will depend on the nature and place of your formation, debt and equity, and factors to be determined.
FIRPTA is when a foreign citizen or company sells a U.S. real estate property. The buyer must withhold 10 percent (if the seller is an individual) or 35 percent (if the seller is a business entity). The FIRPTA rule applies even if the property is a sold at loss. The seller may request refund after the 10 percent or 35 percent have been paid to the IRS and a tax return for the following year has been filed. If you fall under any of the exemptions, you will likely not be liable for the FIRPTA taxes: when the sale price is less than $300,000; when the real estate property is a foreign corporation; if the transferer gives you penalties; when the IRS gives you withholding certificate with excuse; if the corporation is not a U.S. real property holding company; when the seller provides a legal notice from the IRS; if the property is partnership or with a publicly traded trust; when the U.S. property is zero. The best way to avoid FIRPTA would be if you have a U.S. citizen or hold a green card. But for any other foreign sellers who cannot provide such documentation, we have seen solutions for avoiding or at least reducing the FIRPTA if: At $300,000 they are selling the property for $300,000 or less and the buyer signs an affidavit, confirming that he or she will use that property as his or her main residence minimum period of two years after the sale; Form 8288, when a foreign seller can reduce FIRPTA withheld amount if they apply for a withholding certificate (Form 8288-B). This means that they would need to first have a tax identification number. If they do not, they should apply for one as soon as possible before the closing of the deal. This may take between four to six weeks for the application to be processed and issued. And for the withholding certificate itself, it will take up to 90 days for the IRS to act. I strongly recommend you speak with a legal tax adviser with experience in this sector.