Previously, we discussed the general FIRPTA withholding requirements. Here we discuss the process where a seller is a U.S. tax resident and certifies his non-foreign status to the buyer.
FIRPTA: Non-U.S. Person
Withholding on a real estate transaction is required only if the seller is a non-U.S. person. IRC 7701 defines a “U.S. person” as one who meets any one of the following requirements:
- Is a United States citizen;
- Is a lawfully admitted permanent resident (“green card” holder); or
- Meets the substantial presence test
A person meets the substantial presence test if they are present in the U.S. for at least 31 days during the current year, and the sum of the days in which the individual is present is greater than 183 days for the current year and 2 preceding years using the applicable multiplier:
|In the case of days in:||The applicable multiplier is:|
1st preceding year
2nd preceding year
There are exceptions to the substantial presence test:
- Closer connection to a foreign country
- An exclusion of any days where an individual was unable to leave the U.S. because of a medical condition which arose while such individual was present in the U.S.
- Individuals who are exempt under IRC 7701(b)(5), which include: a foreign government-related individual, a teacher or trainee, a student, or a professional athlete who is temporarily in the U.S. to compete in a sports event.
Seller’s certification of non-foreign status
A seller might be a U.S. resident for tax purposes by meeting the substantial presence test. In such cases, the seller can avoid having tax withheld by providing a certification of non-foreign status to the buyer.
A buyer (transferor) of a U.S. real proeprty is not required to withhold under section 1445(a) if, prior to or at the time of the transfer, the seller furnishes to the buyer a certification that –
(A) States that the transferor is not a foreign person.
(B) Sets forth the transferor’s name, identifying number and home address (in the case of an individual) or office address (in the case of an entity), and
(C) Is signed under penalties of perjury.
Sample certification of non-foreign status
Below is a sample certification that may be used by a seller to certify non-foreign status.
“Section 1445 of the Internal Revenue Code provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. For U.S. tax purposes (including section 1445), the owner of a disregarded entity (which has legal title to a U.S. real property interest under local law) will be the transferor of the property and not the disregarded entity. To inform the transferee that withholding of tax is not required upon the disposition of a U.S. real property interest by [name of transferor] , the undersigned hereby certifies the following on behalf of [name of the transferor]:
1. [Name of transferor] is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations);
2. [Name of transferor] is not a disregarded entity as defined in § 1.1445-2(b)(2)(iii);
3. [Name of transferor]’s U.S. employer identification number is ___; and
4. [Name of transferor]’s office address is _______.
[Name of transferor] understands that this certification may be disclosed to the Internal Revenue Service by transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.
Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct, and complete, and I further declare that I have authority to sign this document on behalf of [name of transferor].
Before a seller makes such a certification, they should verify that they do meet the substantial presence test. They should also review their tax position to ensure that they do not expect to claim closer connection or treaty tie-breaker exceptions, and also that they do not have excludable days from the substantial presence test. Otherwise, signing a certification of non-foreign status would contract and jeopardize their later tax return position.
Buyer’s reliance on a seller’s certification
A buyer may rely upon a transferor’s certification unless he:
(A) Has actual knowledge that the transferor’s certification is false; or
(B) Receives a notice that the certification is false from a transferor’s or transferee’s agent
A buyer that obtains such a certification must retain that document for five years.
We assist parties in real estate transactions that are subject to FIRPTA. Contact us to see how we can help.