Under the Foreign Investment in Real Property Tax Act (“FIRPTA”), a person or entity purchasing a U.S. real property interest from a foreign person is required to withhold ten percent (10%) of the amount realized upon sale (gross sale price) from a foreign owner such as a Canadian. I.R.C. § 1445 What that means, in effect, is that the Seller has to remit ten percent (10%) to the IRS.
This withholding ensures that any capital gain tax that may be owed by Seller is paid to the Internal Revenue Service (“IRS”). For additional information about Canadians selling U.S. property, please see David Altro’s March 10, 2010 Blog, What Happens When a Canadian Sells U.S. Property? There are numerous aspects and exceptions to the withholding requirement which will not be discussed in this short blog. Instead, let’s focus on how to figure out the Seller’s tax basis and taxable gain upon sale.
In terms of capital improvements that will bump up your basis, here is what the IRS may be looking for…
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