Foreign Investment in Real Property Tax Act (FIRTA) Withholding FAQ

Foreign Investment in Real Property Tax Act -FIRTA Withholding FAQ

FIRPTA is a tax law passed in 1981 that requires foreign persons to pay U.S. income tax on the gains they make from selling U.S. real estate.

The duty is on the U.S. national buyer to deduct and withhold a portion of the sales price and report the sale to the IRS. Buyers can withhold less than the statutory amount if they obtain a determination of the specific amount of tax owed by the foreign national using IRS Form 8288-B.  Note there are potential consequences on the BUYER for failure to withhold (see question 10 below)

Question 1:  What is the definition of Real Property as it relates to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)?

Answer 1: A U.S. real property interest is an interest, other than as a creditor, in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of real property (such as farming machinery). It also means any interest, other than as a creditor, in any domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or the 5-year period ending on the date of disposition (applicable periods).

An interest in a corporation is not a U.S. real property interest if:

1. Such corporation did not hold any U.S. real property interests on the date of disposition,
2. All the U. S. real property interests held by such corporation at any time during the shorter of the applicable periods were disposed of in transactions in which the full amount of any gain was recognized, and
3. For dispositions after December 17, 2015, such corporation and any predecessor of such corporation was not a RIC or a REIT during the shorter of the applicable periods during which the interest was held.

Question 2:  What is the definition of a “disposition” as it relates to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)?

A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) 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 (special rules for foreign corporations).

In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer, you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.

Question 3:  What are the withholding rates as it relates to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)?

The transferee (seller) must deduct and withhold a tax on the total amount realized by the foreign person on the disposition. The rate of withholding generally is 15% (10% for dispositions before February 17, 2016 or dispositions in excess of $1,000,000, see below).

The amount realized is the sum of:

• The cash paid, or to be paid (principal only);
• The fair market value of other property transferred, or to be transferred; and
• The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.

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.

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 21% of the gain it recognizes on the distribution to its shareholders.

A domestic corporation must withhold tax on the fair market value of the property distributed to a foreign shareholder if:

• The shareholder's interest in the corporation is a U.S. real property interest, and
• The property distributed is either in redemption of stock or in liquidation of the corporation.

For distributions before February 17, 2016, the corporation generally must withhold 10% of the amount realized by a foreign person. For distributions after February 16, 2016, the rate increases to 15%.

• Exceptions from FIRPTA withholding
• Reporting and Paying Tax on U.S. Real Property Interests
• Withholding Certificates
• Format for Applications
• Definitions of terms and procedures unique to FIRPTA

For additional information on the withholding rules that apply to corporations, trusts, estates, and REITs, refer to section 1445 of the Internal Revenue Code and the related regulations. For additional information on the withholding rules that apply to partnerships, refer to discussion under partnership withholding. Also, consult the "U.S. Real Property Interest" section in IRS Publication 515.

FIRPTA documents are processed at:

Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409.

Question 4: If a US Real Property Interest (USRPI) is jointly owned by two spouses, one a foreign person and the other a US person, and the USRPI is disposed of, can the spouse who is a US person report 100% of the amount realized from the disposition and the spouse who is a foreign person report 0% of the amount realized to avoid the withholdings required under Internal Revenue Code Section (IRC) 1445?

Answer 4: No, the amount realized cannot be allocated entirely to one transferor when two or more transferors own the USRPI.

If one or more foreign persons and one or more U.S. persons jointly dispose a USRPI, the amount subject to withholding under IRC 1445 is determined in the following manner:

• The amount realized is allocated among the transferors based on their capital contributions to the USRPI. For this purpose, a husband and wife are treated as having contributed 50% each.
• The transferee/buyer withholds on the total amount allocated to foreign transferor(s).
• The amount of credit for the withholding to be allocated to each foreign transferor is allocated in accordance with the foreign transferors’ agreement. The foreign transferors must request that the withholding be credited as agreed upon by the 10th day after the date of transfer. If no agreement is reached, the transferee will credit the withholding by evenly dividing it among the foreign transferors.

Question 5: In a situation where a US Real Property Interest (USRPI) held in the name of a grantor trust is disposed of and the grantors are a married couple, one a US person and one a foreign person, is withholding under Internal Revenue Code Section (IRC) 1445 required?

Answer 5: Yes, withholding under IRC 1445 is applicable in situations where a USRPI held in the corpus of a grantor trust is disposed of when a foreign person is considered a grantor with respect to all or a part of the USRPI. Based on the grantor trust rules (IRC 671 through IRC 678), an individual is the grantor of the asset(s) he or she contributes to the corpus of a trust that he or she is determined to still have control over under the grantor trust rules.

For example, if a USRPI is purchased equally by a husband, who is a U.S. person, and wife, who is a Foreign person, in their names and then contributed to the corpus of a trust. After the contribution, the husband and wife are determined to still have control over the USRPI under the grantor trust rules. Then the husband and wife are considered grantors, each owning 50% of the USRPI. So, for the purposes of IRC 1445, when the USRPI is disposed of, withholding would be applicable to the foreign spouse’s 50% of the sales proceeds.

Additionally, if a USPRI is purchased in the trust’s name from monies contributed to the trust in equal amounts by both the husband and wife (one U.S. person and one foreign person) and both spouses are considered to be grantors of the monies contributed to the trust used to purchase the USRPI, then both spouses are grantors of the USPRI once it is purchased. In the case, for purposes of IRC 1445, when the USRPI is disposed of, withholding would be applicable to the foreign person’s 50% of the sales proceeds.

Question 6: In which year does a transferor/seller report the disposition of a Real Property Interest (USRPI) on their income tax return, if the date of transfer shown on the Form 8288-A is the subsequent year the USRPY was actually transferred due to a withholding certificate request being filed in the year of the actual disposition, but the determination by the IRS was not made until the subsequent year?

Answer 6: When a transferor/seller disposes of a USRPI, it should be reported, for income tax purposes, in the year the disposition occurred. The date of disposition on the Copy B of Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests PDF, may be different than the actual date of disposition in the situation where a withholding certificate request is made. In these situations, the Internal Revenue Service (IRS) is required to change the date of disposition on the form to the date of the withholding certificate request approval or denial letter sent to the requester.

For example, a transferor/seller sends the IRS a request for a withholding certificate on December 10, 2018 for a disposition of a USRPI that is to take place on December 15, 2018. The IRS reviews the request and issues the withholding certificate denial letter on March 10, 2019. Although the actual date of the disposition is December 15, 2018, the date of disposition on Copy B of Form 8288-A would be March 10, 2019, the date of the denial letter. However, the transferor/seller is required to report the disposition on her or his 2018 income tax return as the actual date of the disposition is December 15, 2018.

Question 7: Is withholding under IRC 1445 applicable in the situation where a foreign person enters a contract to purchase a US Real Property Interest (USRPI) from another person but assigns the right to purchase the USRPI to a third person before the contract’s closing date on the contract?

Answer 7: Withholding under IRC 1445 is applicable when a foreign person assigns their right to purchase a USRPI to another party.

For example: withholding under IRC 1445 is applicable if a foreign person (FP) signs a contract to buy a house in State A from a builder for $400,000 with a closing date of January 31, 2020. Before January 31, 2020, FP decides to sell the right to purchase the house for $30,000 to another individual (WH). WH is required to withhold $4,500, 15% of the of $30,000 amount realized by FP, and remit it to the Internal Revenue Service with Forms 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

Question 8: Does the exclusion of gain from the sale of a personal residence, under IRC 121 apply to Non-Resident Aliens (NRA)?

Answer 8: The exclusion of gain for the sale of a personal residence under IRC 121 may apply to Non-Resident Aliens when they sell their U.S. personal residence. Because Non-Resident Aliens cannot file joint returns unless they are married to U.S. persons, NRAs would need to take their own share of the principal residence exclusion amount on separate tax returns. Consequently, the maximum amount of excludable gain for NRAs that file Form 1040NR, U.S. Nonresident Alien, is $250,000. For the exclusion to apply, NRAs would have to meet the eligibility test required for the exclusion. To determine if a nonresident alien meets the Eligibility Test, you can review the five steps of the Eligibility Test in Publication 523, Selling Your Home, as well as review Topic No. 701, Sale of Your Home.

If an Non-Resident Alien qualifies to claim the IRC 121 exclusion, the statutory withholding under IRC 1445 on the amount realized from the sale could exceed the maximum tax liability on the sale. Therefore, an NRA may request a withholding certificate from the Internal Revenue Service to provide to the buyer. The withholding certificate would allow the buyer (through escrow/closing agent) to withhold tax at an approved reduced rate.

Question 9: How is it determined whether a US Real Property Interest (USRPI) is acquired by the transferee/buyer to be used as a “residence” to meet the reduced withholding under IRC 1445, when the amount realized is between $300,000 and $1,000,000 or the exception from withholding when the amount realized is $300,000 or less??

Answer 9: For a USRPI to be considered a “residence” of the transferee/buyer for the reduced or eliminated withholding, one or more transferees/buyers have to have definite plans to reside at the USRPI for at least 50 percent of the number of days that the property is used by any person during each of the first two 12-month periods following the date of transfer. The number of days that the property will be vacant is not considered in determining the number of days such property is used by any person. A transferee/buyer shall be considered to reside at a property on any day on which a member of the transferee/buyer's family, including brothers and sisters (whether whole or half-blood), spouse, ancestors, and lineal descendants, resides at the property.

For example, a transferee/buyer (BUYER) purchases, in her name only, a USRPI for $299,000 and states she is going to reside in the USRPI. BUYER is not married but has an adult daughter. The property is purchased on January 1, 2017. BUYER and her daughter live in the USRPI together through the end of April 2017. On May 1, 2017, BUYER takes a temporary position overseas where she lives for 8 months while her adult daughter lives in the USRPI. BUYER returns on January 1, 2018, and lives in the USRPI with her daughter until May 31, 2018 when BUYER takes another temporary overseas job until February 22, 2019.

Although BUYER only resided at the USRPI for approximately 33% of the days during 2017 and 42% of the days during 2018, her daughter resided there 100% of the days during 2017 and 2018. Therefore, the USRPI is considered a “residence” of BUYER for 2017 and 2018.

Starting February 16, 2016, there will be changes to the Foreign Investment in Real Property Tax Act (“FIRPTA”) for those USRPI in excess of $300,000 but less than $1,000,000.  The law remains the same for USRPI in excess on $1,000,000.

The 10% rate will still apply for those transactions in which the property is to be used by the Buyer as a residence, provided the sales price does not exceed $1,000,000, and the existing $300,000 “exemption” remains unaffected. So here are the new guidelines:

• • If the sales price is $300,000 or less, AND the property will be used by the Buyer as a residence (as provided for in the current regulations), no sums needs be withheld or remitted.
  • If the sales price exceeds $300,000 but does not exceed $1,000,000, AND the property will be used by the Buyer as a residence, then the withholding rate is 10% on the full amount realized.
  • If the sales price exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the Transferee.

Question 10: If a transferee/buyer purchase a US Real Property Interest (USRPI) from a foreign person for $300,000 or less and plans to use the USRPI as their personal residence for the next two years but does not fulfill this requirement, what actions are required of the transferee/buyer with respect to the withholdings?

Answer 10: If a transferee/buyer of a USRPI fails to withhold from the amount realized in reliance upon the exception that the transferee/buyer planned on using the USRPI as a personal residence for the next two years, but did not in fact reside at the USRPI for the minimum required time, the transferee/buyer shall be liable for the failure to withhold (if the transferor/seller was a foreign person and did not pay the full U.S. tax due on any gain recognized upon the transfer). However, if the transferee/buyer establishes that the failure to reside the minimum number of days was caused by a change in circumstances that could not reasonably have been anticipated at the time of the transfer, then the transferee/buyer shall not be liable for the failure to withhold.

Question 11: When may the Internal Revenue Service (IRS) change the date of the transfer that a withholding agent designed on Form 8288 and 8288-A?

Answer 11: The IRS may change the tax year designated on Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, if the tax year originally entered was incorrect. This could be because the date was the wrong transfer date or there was a withholding certificate request filed and the date of the withholding certificate issued was subsequent to the date of transfer.

For example, if a request for a withholding certificate is filed on November 15, 2016, the actual date of transfer is December 1, 2016 and the IRS issues the withholding certificate on February 2, 2017, the date of transfer for Forms 8288 and 8288-A purposes is February 2, 2017. The tax year on the Form 8288 and Form 8288-A is changed by the IRS to February 2017, the date the withholding certificate is issued. See IRM 3.22.261.21.2. However, the transferor/seller reports the transfer on the income tax return for the year the actual transfer occurred, which is 2016.

Question 12: How may a transferor/seller ensure a transferee/buyer or closing agent will not withhold under IRC 1445 on dispositions of US Real Property Interest (USRPI) when the disposition is exempt from withholding because the amount realized is $300,00 or less and the USRPI will be used as a personal residence by the transferee/buyer??

Answer 12: The transferor/seller can ensure that there will be no withholding under IRC 1445 in situations where the amount realized on the disposition of a USRPI is $300,000 or less and the transferee/buyer is planning on using the USRPI as a personal residence by ensuring the all parties are well informed. This includes making sure the transferee/buyer and the closing agent are aware of the exception to withholding and making sure the transferee/buyer informs the closing agent that they plan on living in the USRPI as a personal residence. The instructions for the Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, provide information on this exception from withholding.

Question 13: When would a transferee/buyer complete a Form 8288-B to request a withholding certificate from the transferor/seller?

Answer 13: A transferee/buyer or the transferor/seller (or authorized person), may complete the Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, and file it to request a withholding certificate for reduced or no withholding under IRC 1445. A transferee/buyer may file the Form 8288-B in situations where 1) the transferee/buyer is more familiar with the administrative procedures related to withholding under IRC 1445, or 2) the transferee/buyer may be aware that a reduced rate of withholding or no withholding is applicable, and filing the Form 8288-B and getting an approved withholding certificate would reduce their administrative burden of withholding and remitting tax and completing and filing Form 8288 and Form 8288-A.

Question 14: If a foreign transferor/seller has a current address outside of the US and applies for a withholding certificate, how can the transferor/seller ensure the withholding certificate is provided to the escrow agent/closing company by the Internal Revenue Service (IRS)?

Answer 14: A foreign transferor/seller who is residing overseas at the time they request a withholding certificate may put the escrow or closing company’s information in Box 5 of the Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, to ensure that the closing agent timely receives IRS correspondence with respect to a determination made on a request of a withholding certificate.

Question 15: May a foreign person request and receive Individual Taxpayer Identification Number (ITIN) prior to entering into a contract to dispose of a U.S. Real Property Interest (USRPI) if they have no other reason to obtain an ITIN?

Answer 15: No, a foreign person, who does not have a valid reason to obtain an ITIN, cannot request an ITIN prior to entering a contract to dispose of a USRPI. A foreign person, who does not have and is not eligible to receive a social security number, can only apply for and receive an ITIN using Form W-7, Application for IRS Individual Taxpayer Identification Number, in certain situations including but not limited to a requirement to 1) file a U.S. federal tax return, 2) claim a reduced withholding under an applicable income tax treaty, and 3) to be claimed as a dependent on another individual’s income tax return.

Therefore, absent any other valid reason to obtain an ITIN, the IRS will deny an application for an ITIN submitted prior to entering into a contract to dispose of a USRPI. As soon as there is a legally binding contract for the sale of a USRPI, the foreign person/seller is eligible to request an ITIN by filing Form W-7 under Exception #4, Third-Party Withholding – Disposition by a Foreign Person of a U.S. Real Property Interest.

Question 16:  How Long does the IRS take to act on a withholding certificate application, if the transferor/seller does not have an Individual Taxpayer Identification Number (ITIN) and applies for an Individual Taxpayer Identification Number (ITIN at the time the withholding certificate is submitted.

We have Certified Acceptance Agents on staff that can authenticate your documentation, certify your identity, and submit applications to the IRS on your behalf. Some parts of the application process can be done online if you are not able to meet with her in person.

Answer 16: The IRS will normally act on a withholding certificate application within 90 days of receipt of all information necessary to make a proper determination.

If a transferee/buyer or transferor/seller does not have a TIN and an ITIN is requested at the same time as the withholding certificate request, the ITIN request is processed within 10 days of receipt. The completed Form W-7 needs to include the completed form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, with the entire package forwarded to the IRS at the address given in the Form W-7 instructions.

Question 17:  Can I still work with you if I already have an accountant or CPA?

Answer 17: Absolutely! We love to work with other tax professionals. We are very respectful of existing relationships and take these types of engagements seriously and we are happy to assist in any capacity.