FIRPTA: Flagged for Review

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Perhaps the most well-known and prohibitive stipulation of FIRPTA is that 10 percent of the gross proceeds of a property sale is withheld as a deposit against gains.

“Anytime a foreign person is selling real property, he has to withhold 10 percent of the sales price and hand that over to the IRS,” Mr. Larson explained.

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However, problems arise when the 10 percent withholding does not accurately reflect forthcoming taxes.

“Let’s say you have a sale now in 2013 and you are over-withheld. Usually you have to wait to get the refund, and that can put financial pressure on sellers,” said Deirdre Joyce, international tax senior manager at Rothstein Kass.

That’s where the tax pros come in: There is an opportunity to reduce the withholding by petitioning the Internal Revenue Service for what is known as a withholding certificate.

“I worked with a couple of individuals this year who sold property, and, though FIRPTA applies, we go through a procedure whereby we petition the IRS for a reduced withholding certificate,” Mr. Larsen said.

Withholding certificates may be requested on behalf of a property transferor and are issued should the IRS determine a series of parameters are met, including that the amount withheld exceeds the maximum tax liability.

“More often than not, the transferor doesn’t have to withhold the 10 percent, because there’s ways to navigate around it,” Mr. Larsen noted.

For U.S. property owners trying to attract foreign capital, it can be a challenge to present deals that are structured in a way to make investment more appealing.

“Some foreigners won’t buy into U.S. real estate for this reason, and those that do have challenges and structural complexity to try to minimize the impact,” Mr. Varellas said.

Ms. Joyce noted some of her clients have attempted to tackle the problem by attempting to set up a hedge fund structure to attract foreign investment. Others might use a corporation so all property sales and taxes are handled at a corporate level.

Some prominent commercial transactions with foreign investors in recent months have used a minority-share joint-venture structure, which may have been motivated by the desire to minimize the impact of FIRPTA.

Among those deals was the sale of a 40 percent stake in the General Motors Building to the family of Chinese developer Zhang Xin and the Safra family of Brazil. The $1.4 billion deal, which closed in May, valued the trophy tower at approximately $3.4 billion.

“A lot of foreign investment comes from minority shares,” noted Matt Bonney, partner at Citrin Cooperman. “We don’t deal with FIRPTA much, because a lot of our foreign investment clients don’t have majority control.”

Though some tax professionals identify FIRPTA as a significant barrier to entry for foreign investors interested in the U.S. real estate market, others argue its impact is, in fact, minimal.

“I think its part of the cost of doing business,” Ms. Joyce said. “If someone doesn’t want to pay taxes on gains coming from the U.S., they shouldn’t make the investment.”

Indeed, where FIRPTA is truly evident as a deterrent is in the individual residential market.

“One place you do see FIRPTA is when you’re dealing with an individual buying second, third and fourth residences,” Mr. Bonney said.

Many other countries enforce similar systems, accountants noted, though the system in the United States was labeled both “imperfect” and “arduous” by industry insiders.

“In most countries, if you have investment in real estate, that’s going to be taxed locally,” Ms. Joyce added.

Despite differing opinions on the true cost of FIRPTA, all accountants agreed on one thing: Preparing for the inevitable is a key to success.

“I think it’s important that if someone is thinking about making an investment that they get advice ahead of time and make sure there aren’t any hidden surprises,” Ms. Joyce said. “There are opportunities to do planning and structuring.”