FIRPTA and DEFRA
The Foreign Investment and Real Property Tax Act (FIRPTA) was enacted in 1980 for the purpose of taxing gains accrued from the disposition of real property to foreign investors. However, the law was not specific in creating the appropriate mechanism to make foreign investors comply with the law.
The Deficit Reduction Act of 1984 (DEFRA) established the mechanism for withholding and compliance with the law. It requires that the closing agent of a real estate transaction involving a foreign seller must withhold, file a report, and transmit 10% of the gross sales price to the IRS, within ten days of the closing transaction.
Note: The IRS considers a withholding real estate practitioner as all parties involved in the transaction (real estate brokers, attorneys, buyers). The IRS charges each party individually and collectively in making sure that the 10% withholding takes place at the time of closing. There are civil and possible criminal penalties for failure to comply.
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