FIRPTA witholding rules may apply to a disposition of a U.S. real property interest by a foreign person. Such transactions are subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.
Here’s what buyer and sellers need to know in situations where the buyer might be considered a foreign person.
What is a Foreign Person for FIRPTA Withholding Purposes?
A foreign person is someone who is not a resident for U.S. tax purposes. More specifically, a foreign person does not meet either one of the following tests:
- Lawful permanent resident test: An individual who holds a green card is considered a resident for tax purposes for the period of time that he was a lawful permanent resident.
- Substantial presence test: An individual that spends at least 31 days during the current calendar year; and the sum of the total number of US presence days in the current year, plus 1/3 of the total US presence days in the preceding year, plus 1/6 of the US days during the second preceding year equals or exceeds 183 days.
What is the Buyer’s Responsibility if Purchasing a Property from a Foreign Seller?
Persons purchasing U.S. real property interests from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition.
If you are the transferee/buyer you must find out if the transferor/seller is a foreign person. If the transferor (seller) is a foreign person and you fail to withhold, you may be held liable for the tax.
If the transferor is a foreign person, then the buyer must use Forms 8288 and 8288-A to report and pay to the IRS any tax withheld on the acquisition of U.S. real property interests.
- Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
- Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests
FIRPTA Withholding Rates
The transferee (buyer) must deduct and withhold a tax on the total purchase price by the foreign person on the disposition. The rate of withholding generally is 15% (10% for dispositions before February 17, 2016).
If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.
Exceptions from FIRPTA Withholding
The following are exceptions to the FIRPTA withholding rule:
- The transferee (buyer) may be exempt from withholding if transferee acquires the property for use as a residence and the amount realized (sales price) is not more than $300,000.
- The transferor (seller) gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor’s name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).
- You receive a withholding certificate from the Internal Revenue Service that excuses withholding.
- The transferor (seller) gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the Ogden Service Center, P.O. Box 409101, Ogden, UT 84409.
- The amount the transferor (Seller) realizes on the transfer of a U.S. real property interest is zero. This is not common obviously, unless the property is gifted.
- The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale, exchange, or exercise of that option.
Reducing the Rate of Withholding
The default withholding rate of 15% on the entire amount of the sales price of the property is quite harsh. Capital gains on the sale of real estate are determined by netting of the sales price and the adjusted basis (property cost plus improvements plus costs of sale and other expenses). In some cases there may be capital losses. So a 15% withholding rate would be excessive in many cases. A seller can later file a U.S. tax return as a non-resident and obtain a refund for the extra withholding, or the seller may apply for a reduced rate of withholding.
A reduced rate of withholding may be allowed upon the submission and acceptance of Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. Form 8288-B can be used to apply for a withholding certificate to reduce or eliminate withholding on dispositions of U.S. real property interests by foreign persons, but only if the application is based on:
- A claim that the transferor is entitled to nonrecognition treatment or is exempt from tax,
- A claim solely on a calculation that shows the transferor’s maximum tax liability is less than the tax otherwise required to be withheld, or
- A claim that the special installment sales rules described in section 7 of Rev. Proc. 2000-35 allowed reduced withholding.
Blanket Withholding Certificates
A blanket withholding certificate may be issued if the transferor holding the U.S. real property interests provides an irrevocable letter of credit or a guarantee and enters into a tax payment and security agreement with the IRS. A blanket withholding certificate excuses withholding concerning multiple dispositions of those property interests by the transferor or the transferor’s legal representative during a period of no more than 12 months.
How to Get Help
We’ve consulted both buyers and sellers in FIRPTA matters. Contact us at (281) 746-6066 or (800) 580-0622 if we can be of assistance in your transaction.