How LLCs Registered in the U.S., but Owned by Foreigners Are Treated Under FIRPTA

When someone not from the United States sells or otherwise disposes of property they own here, they usually must withhold 15 percent of the amount realized in the transaction and remit it to the IRS within 20 days of the closing. This is mandated by the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). While this law is fairly straightforward in its treatment of foreign individuals, many people have questions about FIRPTA’s application to limited liability companies (LLCs) owned by foreigners but formed and registered in the United States.

The IRS guidance on the use of FIRPTA in property dispositions adheres to the following frameworks, which vary based on the ownership and tax status of the LLC:

• LLCs owned by a single foreign person — Regardless of where it is registered, an LLC that is fully owned by someone from another country is treated as if it were owned personally by that individual. Therefore, FIRPTA would apply and funds should be withheld at closing for that purpose.
• LLCs owned by more than one party and taxed as partnerships — When more than one person maintains an ownership stake in an LLC, that LLC is no longer considered a “disregarded entity” under federal tax law. This means that no proceeds from the sale need to be withheld by a multi-member LLC even if the owners are foreign persons and their income is taxed individually as they would be in a partnership.
• LLCs owned by more than one party and taxed as corporations — An LLC that is treated like a corporation for tax purposes is not subject to FIRPTA withholding rules. Corporations are independent entities subject to taxation on their own without regard for whether their shareholders are domestic or foreign.

Given how substantial the FIRPTA withholding amount is, you should have a thorough understanding as to whether this law will be applied in your real estate transaction. You might also have questions regarding the definition of a “foreign person” under the Tax Code and the exemption that can apply to residential properties sold for less than $300,000. No matter what specific question you have, it’s wise to speak with an attorney familiar with FIRPTA before you commit to a deal.

Norma Echarte & Associates in Miami advises clients on FIRPTA matters and a full range of issues relating to real estate transactions involving foreign persons. To schedule an appointment, please call {PHONE} or contact us online.