FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA)
Withholding of Tax on Dispositions of United States Real Property Interests
The disposition of a US real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.
FIRPTA authorised the United States to tax foreign persons on dispositions of US real property interests.
A US real property interest includes sales of interests in parcels of real property as well as sales of shares in certain US corporations that are considered US real property holding corporations.
Persons purchasing US real property interests (transferee) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 10 percent of the amount realised (special rules for foreign corporations).
Withholding is intended to ensure US taxation of gains realised on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.
One of the most common exceptions to FIRPTA withholding is that the transferee (purchaser/buyer) is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his home and the purchase price is not more than $300,000.
For further information from the IRS website regarding tax withholding and filing exceptions visit http://www.irs.gov/businesses/small/international/article/0,,id=105000,00.html