FIRPTA Withholding

FIRPTA Withholding

Withholding of Tax on Dispositions of United States Real Property Interests

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The disposition of a U.S. real property interest by a foreign person (the transferor) is 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.

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 where 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.

U.S. Real Property Interest

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:

Such corporation did not hold any U.S. real property interests on the date of disposition,
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
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.

Rates of Withholding

The transferee must deduct and withhold a tax on the total amount realized by the foreign person on the disposition. The withholding rate generally is 15% (10% for dispositions before February 17, 2016).

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 the property is subject to immediately before and after the transfer.

If the property transferred was owned jointly by the 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 35% 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 the redemption of stock or in the corporation's liquidation.

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%.

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. Refer to the discussion under Partnership withholding for additional information on the withholding rules that apply to partnerships. 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.

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

Exceptions from FIRPTA Withholding

Generally, you do not have to withhold in the following situations; however, notification requirements must be met:

You (the transferee) acquire the property for use as a residence, and the amount realized (sales price) is not more than $300,000.

You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days any person uses the property during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant. For this exception, the transferee must be an individual.

The property disposed of is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded corporations.

The disposition is of an interest in a domestic corporation, and that corporation furnishes you a certification stating, under penalties of perjury, that the interest is not a U.S. real property interest. In most cases, the corporation can make this certification only if either of the following is true.

During the previous five years (or, if shorter, the period the interest was held by its present owner), the corporation was not a USRPHC.

As of the date of disposition, the interest in the corporation is not a U.S. real property interest because of section 897(c)(1)(B) of the Code. The certification must be dated not more than 30 days before the date of transfer.

The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and contains the transferor's name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).

The transferor can give the certification to a qualified substitute. For this purpose, a qualified substitute is (a) the person (including any attorney or title company) responsible for closing the transaction, other than the transferor's agent, and (b) the transferee's agent. Under penalties of perjury, the qualified substitute gives you a statement that the certification is in possession of the qualified substitute.

You receive a withholding certificate from the Internal Revenue Service that excuses withholding. See Withholding Certificates later.

The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a non-recognition 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.

Section 121 of the U.S. Internal Revenue Code allows for the exclusion of up to $250,000 in gains arising from the sale of a "principal residence." The exclusion should apply whether the property is in the U.S. or a foreign country. In the case of married couples filing a joint return, up to $500,000 may be excluded. The tax law is very specific in how it defines a "principal residence" and in the "ownership" and "use" requirements that form part of the definition for utilizing this exclusion.

The amount the transferor realizes on the transfer of a U.S. real property interest is zero.

Selling Price-Selling Expenses= Amount Realized

Note: An outstanding loan is not considered a selling expense

The property is acquired by the United States, a U.S. state or possession, a political subdivision, or the District of Columbia.

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.

The disposition is of an interest in a publicly-traded partnership or trust. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded partnerships or trusts.

Certifications

The certifications in items (3) and (4) are not effective if you (or the qualified substitute) have actual knowledge or receive a notice from an agent (or substitute) that they are false. This also applies to the qualified substitute's statement under item (4).

Suppose regulations require you (or the substitute) to furnish a copy of the certification (or statement) to the IRS, and you (or the substitute) fail to do so in the time and manner prescribed. In that case, the certification (or statement) is not effective.

Liability of Agent or Qualified Substitute

If you (or the substitute) receive a certification discussed in item (3) or (4) or a statement in item (4), and the agent, or substitute, has actual knowledge that the certification (or statement) is false, or in the case of (3), that the corporation is a foreign corporation, the agent (or substitute) must notify you, or the agent (or substitute) will be held liable for the tax. The agent's (or substitute's) liability is limited to the compensation the agent (or substitute) gets from the transaction.

An agent is any person who represents the transferor or transferee in any negotiation with another person (or another person's agent) relating to the transaction or settling the transaction. A person is not treated as an agent if the person only performs one or more of the following acts related to the transaction:

Receipt and disbursement of any part of the consideration,
Recording of any document,
Typing, copying, and other clerical tasks,
Obtaining title Insurance reports and reports concerning the condition of the property, or
Transmitting documents between the parties.

A Withholding Agent is any person having the control, receipt, custody, disposal, or payment of income that is subject to withholding. A Withholding Agent is personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest. Generally, the person who pays an amount to the foreign person subject to withholding must do FIRPTA withholding.

Penalties for Failure to Comply

Section 1461 makes every person required to deduct and withhold tax liable for that tax. 26 CFR 1.1145-1(e)(1). If the buyer fails to withhold the required tax from the seller, then the IRS will collect the tax from the buyer. 26 CFR 1.1445-1(e)(2). A buyer that fails to deduct and withhold tax will also be liable for the interest between the last date when the tax was due and the date when the buyer finally pays the tax. 26 CFR 1.1445-1(e)(2)(ii).

If a buyer fails to withhold and the seller subsequently files an income tax return and pays any tax due then the buyer is no longer liable for the tax. 26 CFR 1.1445-1(e)(3)(i). The buyer will still be liable for the interest if the seller files the return late and does not pay any accrued interest. 26 CFR 1.1445-1(e)(3)(ii). If the IRS issues a withholding certificate establishing that the seller does not owe any tax, then the tax will not be collected from the buyer and no penalty will be imposed for failure to pay the tax. 26 CFR 1.1445-1(e)(3)(B).

Privacy Concerns in FIRPTA Reporting

Some sellers are uncomfortable giving their social security number or other taxpayer identification number to the buyer in their real estate transaction. While these are legitimate and understandable concerns, the IRS has not provided for an alternate procedure to use in reporting FIRPTA transactions. Therefore, some sellers are requiring buyers and their agents to sign a nondisclosure agreement in which the buyer and his or her agent agree to keep the seller's social security number or other taxpayer identification number confidential.

Beyond that, sellers may want to consider the following aspects of FIRPTA reporting and the extent to which they may be used to reduce the need to give the buyer a social security number or other taxpayer identification number, or reduce the risk of doing so:

Reporting and Paying Tax on U.S. Real Property Interests

Two forms are generally used for reporting and paying the tax to the IRS regarding the acquisition of U.S. real property interests.

Transferees 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. These forms must also be used by corporations, partnerships, estates, and trusts that must withhold tax on distributions and other transactions involving U.S. real property interests. You must include the U.S. TIN of both the transferor and transferee on the forms (refer to the "Requirement for Taxpayer Identification Numbers (TIN's)" section below).

For partnerships disposing of U.S. real property interests, the manner of reporting and paying over the tax withheld is the same as discussed under Reporting and Paying Tax on Partnership Withholding.

For publicly traded trusts and real estate investment trusts, you must use Forms 1042 and 1042-S procedures for reporting and paying over tax withheld on distributions from dispositions of U.S. real property interests. Use Income Codes 24, 25, and 26 on Form 1042-S for transactions involving these entities.

Form 8288

The tax withheld on acquiring a U.S. real property interest from a foreign person is reported and paid using Form 8288. Form 8288 also serves as the transmittal form for copies A and B of Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. Generally, you must file Form 8288 by the 20th day after the date of the transfer.

If an application for a withholding certificate is submitted on Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, to the IRS before or on the date of a transfer and the application is still pending with the IRS on the date of transfer, the correct withholding tax must be withheld, but does not have to be reported and paid immediately. The amount withheld (or lesser amount as determined by the IRS) must be reported and paid within 20 days following the day the IRS mails a copy of the withholding certificate or notice of denial.

If the principal purpose of applying for a withholding certificate is to delay paying the withheld tax to the IRS, the transferee will be subject to interest and penalties. The interest and penalties will be assessed beginning on the 21st day after the date of transfer and ending on the day the payment is made.

Form 8288-A

The withholding agent must prepare Form 8288–A for each person from whom tax has been withheld. Attach copies A and B of Form 8288–A to Form 8288. Keep Copy C for your records.

IRS will stamp Copy B and send it to the person subject to withholding. That person must file a U.S. income tax return and attach the stamped Form 8288–A to receive credit for any tax withheld.

CAUTION! A stamped copy of Form 8288–A will not be provided to the transferor if the transferor's TIN is not included on that form. In this case, to get credit for the withheld amount, the transferor must attach to his/her U.S. income tax return substantial evidence of withholding (for example, closing documents) and a statement that contains all the required information shown on Forms 8288 and 8288–A, including the transferor's TIN.

Application for Reduced Rate of Withholding

A reduced withholding rate 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. Refer to Format for Applications for more information. Refer also to Exceptions from FIRPTA withholding.

To qualify, the applicant must have filed, and paid taxes related to the sale of the property or is exempt from withholding or non-recognition or special installment sale rules under section 7 of Rev. Proc. 2000-35 applies

Requirement for Taxpayer Identification Numbers (TIN's)

Treasury Decision 9082 (effective November 4, 2003) requires all transferees (buyers) and foreign transferors (sellers) of U.S. real property interests to provide their TIN's, names and addresses on withholding tax returns, applications for withholding certificates, a notice of non-recognition, or elections under sections IRC 897(i) when disposing of a U.S. real property interest.

If the transferor sends Forms 8288 and 8288-A to the IRS for processing but does not list a TIN on the forms and does not attach a Form W-7 ITIN application, the IRS will process the forms but will not date stamp Form 8288-A "Copy B Mailed" or forward it to the foreign transferor. Instead, the IRS will mail Letter 3794 SC/CG to the foreign transferor, instructing the transferor to apply for an ITIN by filing Form W-7.

Refer to ITIN Guidance for Foreign Property Buyers/Sellers for more information.

Form 1099-S, Proceeds From Real Estate Transactions

Generally, the real estate broker or other person responsible for closing the transaction must report the sale of the property to the IRS using Form 1099-S. For more information about Form 1099-S, refer to the Instructions for Form 1099-S and the General Instructions for Forms 1099, 1098, 5498, and W-2G.

Withholding Certificates Related to U.S. Real Property Interest

The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted according to a withholding certificate issued by the IRS. A transferor that applies for a withholding certificate must notify the transferee in writing that the certificate has been applied for on the day of or the day before the transfer. The transferee, the transferee's agent, or the transferor may request a withholding certificate. The IRS will generally act on these requests within 90 days after receipt of a complete application including the Taxpayer Identification Numbers (TIN's) of all the parties to the transaction.

A withholding certificate may be issued due to:

A determination by the IRS that reduced withholding is appropriate because either:
1. The amount that must be withheld would be more than the transferor's maximum tax liability, or
2. Withholding the reduced amount would not jeopardize the collection of the tax,
The exemption from U.S. tax of all gains realized by the transferor, or
An agreement for tax payment provides security for the tax liability entered into by the transferee or transferor.

Categories

All applications for withholding certificates are divided into six basic categories. This categorizing provides for specific information that is needed to process the applications. The six categories are:

Applications based on a claim that the transfer is entitled to non-recognition treatment or is exempt from tax,
Applications based solely on a calculation of the transferor's maximum tax liability,
Applications under special installment sale rules,
Applications based on an agreement for the payment of tax with conforming security,
Applications for blanket withholding certificates, and
Applications on any other basis.

Please refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for detailed instructions on applying for a withholding certificate under the six categories above.

Availability of Records

The applicant must make available to the IRS, within the time prescribed, all information required to verify that representations relied upon in accepting the agreement are accurate and that the obligations assumed by the applicant will be performed according to the agreement. Failure to provide requested information promptly will usually result in the rejection of the application unless the IRS grants an extension of the target date.

Applications for FIRPTA Withholding Certificates

Use Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests to apply for a withholding certificate under categories (1), (2), and (3).

Do not use Form 8288-B for applications under categories (4), (5), and (6). For these categories, follow the instructions given here.

The application must be signed by the individual or a duly authorized agent (with a copy of a power of attorney, such as Form 2848, attached), a responsible officer in the case of a corporation, a general partner in the case of a partnership, or a trustee, executor, or equivalent fiduciary in the case of a trust or estate. The person signing the application must verify under penalties of perjury that all representations are true, correct, and complete to that person's knowledge and belief. Suppose the application is based in whole or in part on information provided by another party to the transaction. In that case, that information must be supported by a written verification signed under penalties of perjury by that party and attached to the application.

The application must be sent to:

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

All applications for withholding certificates must use the following format. The information must be provided in paragraphs labeled to correspond with the numbers and letters set forth below. If the information requested does not apply, place "N/A" in the relevant space.

Information on the application category:
1. State which category describes the application (Refer to Categories),
2. If a category (4) application:
  1. State whether the proposed agreement secures (A) the transferor's maximum tax liability, or (B) the amount that would otherwise have to be withheld, and
  2. State whether the proposed agreement and security instrument conform to the standard formats.
Information on the transferee or transferor:
1. State the name, address, and Taxpayer Identification Number (TIN) of the person applying for the withholding certificate (if this person does not have a TIN and is eligible for an Individual Taxpayer Identification Number (ITIN), he or she can apply for the ITIN by attaching the application to a completed Form W-7 and forwarding the package to the address given in the Form W-7 instructions).
2. State whether that person is the transferee or transferor, and
3. State the name, address, and TIN of all other transferees and transferors of the U.S. real property interest for which the withholding certificate is sought.
Information on the U.S. real property interest for which the withholding certificate is sought state the following:
1. Type of interest (such as interest in real property, in associated personal property, or a domestic U.S. real property holding corporation),
2. Contract price,
3. Date of transfer,
4. Location and general description (if an interest in real property),
5. Class or type and amount of the interest in a U.S. real property holding corporation, and
6. Whether in the three preceding tax years: (1) U.S. income tax returns were filed relating to the U.S. real property interest, and if so, when and where those returns were filed, and if not, why returns were not filed, and (2) U.S. income taxes were paid relating to the U.S. real property interest, and if so, the amount of tax paid.
Provide full information concerning the basis for the issuance of the withholding certificate. Although the information to be included in this section of the application will vary from case to case, the following rules provide general guidelines for including appropriate information for each category of application.

Category (4) Applications

If the application is based on an agreement for the payment of tax, the application must include:

Information establishing the transferor's maximum tax liability, or the amount that otherwise has to be withheld,
A signed copy of the agreement proposed by the applicant, and
A copy of the security instrument submitted by the applicant.

Either the transferee or the transferor may enter into an agreement for the payment of tax. The agreement is a contract between the IRS and any other person and consists of two necessary elements. Those elements are:

A detailed description of the rights and obligations of each, and
A security instrument or other form of security acceptable to the Commissioner or his delegate.

For more information on the agreement for the payment of tax, including a sample agreement, refer to section 5 of Revenue Procedure 2000-35. Revenue Procedure 2000-35 is in Cumulative Bulletin 2000-2.

There are four major types of security acceptable to the IRS. They are:

Bond with surety or guarantor,
Bond with collateral,
Letter of credit, and
Guarantee (corporate transferors).

In unusual circumstances and at its discretion, the IRS may accept an additional form of security that it finds to be adequate.

For more information on acceptable security instruments, including sample forms of these instruments, refer to section 6 of Revenue Procedure 2000-35

Category (5) Applications

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.

For more information, refer to section 9 of Revenue Procedure 2000-35

Category (6) Applications

These are non-standard applications and may be of the following types.

Agreement for Payment of Tax with Nonconforming Security

An applicant seeking to enter into an agreement for the payment of tax but wanting to provide a non-conforming type of security must include the following in the application:

The information required for Category (4) applications, discussed earlier,
A description of the non-conforming security proposed by the applicant, and
A memorandum of law and facts establishes that the proposed security is valid and enforceable and adequately protects the government's interest.

Other Non-standard Applications

An application for a withholding certificate not previously described must explain in detail the proposed basis for the issuance of the certificate and set forth the reasons justifying the issuance of a certificate on that basis.

Availability of Records

Amendments to Applications

An applicant for a withholding certificate may amend an otherwise complete application by sending an amending statement to the Director, Ogden Service Center, at the address shown earlier. There is no particular form required, but the amending statement must provide the following information:

The name, address, and taxpayer identification number (if any) of the person providing the amending statement specifying whether that person is the transferee or transferor,
The date of the original application for a withholding certificate that is being amended,
A brief description of the real property interest for which the original application for a withholding certificate was provided, and
The basis for the amendment includes any change in the facts supporting the original application for a withholding certificate and any change in terms of the withholding certificate.

The statement must be signed and accompanied by a penalties of perjury statement.

If an amending statement is provided, the time in which the IRS must act upon the application is extended by 30 days. If the amending statement substantially changes the original application, the time for acting upon the application is extended by 60 days. Suppose an amending statement is received after the Director, Ogden Service Center, has signed the withholding certificate but has not been mailed to the applicant. In that case, the IRS will have a 90-day extension of time to act.

References/Related Topics

Road Map to Regulations

Withholding on dispositions of U.S. real property interests by foreign persons can be found in the following Treasury Regulation sections:

Sec. 1.1445-1. Withholding on dispositions of U.S. real property interests by foreign persons: In general.

Sec. 1.1445-2. Situations in which withholding is not required under IRC section 1445(a).

Sec. 1.1445-3. Adjustments to the amount required to be withheld pursuant to the withholding certificate.

Sec. 1.1445-4. Liability of agents.

Sec. 1.1445-5. Special rules concerning distributions and other transactions by corporations, partnerships, trusts, and estates.

Sec. 1.1445-6. Adjustments are pursuant to the withholding certificate of the amount required to be withheld under IRC section 1445(e).

Sec. 1.1445-7. The treatment of foreign corporations that have made an election under IRC section 897(i) is treated as domestic corporations.

Sec. 1.1445-8. There are special rules regarding publicly traded partnerships, publicly traded trusts, and real estate investment trusts (REITs).

Sec. 1.1445-10T. Special rule for foreign governments (Temporary).

Sec. 1.1445-11T. Special rules requiring withholding under section 1.1445-5 (Temporary).

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

Definitions of Terms and Procedures Unique to FIRPTA

Dispositions

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to income tax withholding (IRC section 1445). The transferee is the withholding agent. If you are the transferee, 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.

Normally the sale/purchase of real estate qualifies as a disposition; however, many other transactions also qualify as dispositions (e.g., gifts, redemptions, capital contributions, etc.).

Withholding is required on certain distributions and other transactions by domestic or foreign corporations, partnerships, trusts, and estates.

Corporations

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain it recognizes on the distribution to its shareholders. However, this withholding requirement does not apply if the foreign corporation has elected under IRC section 897(i) to be treated as a domestic corporation.

A domestic corporation must withhold a tax equal to 10% of the fair market value of the property distributed to a foreign person if:

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

U.S. real property holding corporations. A distribution from a domestic corporation that is a U.S. real property holding corporation (USRPHC) is generally subject to NRA withholding and withholding under the U.S. real property interest provisions. This also applies to a corporation that was a USRPHC at any time during the shorter of the period during which the U.S. real property interest was held or the 5-year period ending on the date of disposition. A USRPHC can satisfy both withholding provisions if it withholds under one of the following procedures.

Apply NRA Withholding on Forms 1042/1042-S on the full amount of the distribution, whether or not any portion of the distribution represents a return of basis or capital gain. If a reduced tax rate applies under an income tax treaty, then the withholding rate must not be less than 10% unless the treaty specifies a lower rate for distributions from a USRPHC.
Apply NRA Withholding on Forms 1042/1042-S to the portion of the distribution that the USRPHC estimates is a dividend. Then, withhold 10% on the remainder of the distribution (or a smaller amount if a withholding certificate is obtained and the amount of the distribution that is a return of capital is established).

The same procedure must be used for all distributions made during the year. A different procedure may be used each year.

Partnerships

If a domestic partnership that is not publicly traded disposes of a U.S. real property interest at a gain, the gain is treated as effectively connected income and is subject to the rules explained under Partnership Withholding on Effectively Connected Income and would not be subject to withholding under the FIRPTA provisions.

A publicly traded partnership that disposes of a U.S. real property interest must withhold tax on distributions to foreign partners unless it elects to withhold based on effectively connected taxable income allocable to foreign partners as discussed under Publicly Traded Partnerships.

Trust and Estates

You are a Withholding Agent if you are a trustee, fiduciary, or executor of a trust or estate having one or more foreign beneficiaries. You must establish a U.S. real property interest account. You enter in the account all gains and losses realized during the taxable year of the trust or estate from dispositions of U.S. real property interests. A distribution from a trust or estate to a beneficiary (foreign or domestic) will be treated as attributable first to any balance in the U.S. real property interest account and then to other amounts. You must withhold 35% on any distribution to a foreign beneficiary that is attributable to the balance in the real property interest account on the day of the distribution.

A trust with more than 100 beneficiaries may elect to withhold from each distribution 35% of the amount attributable to the foreign beneficiary's proportionate share of the current balance of the trust's real property interest account. This election does not apply to publicly traded trusts or real estate investment trusts (REITs). Refer to section 1.1445-5(c) of the regulations for more information about this election.

Publicly traded trusts and REITs must withhold on distributions of U.S. real property interests to foreign persons. The withholding rate is 35%. For more information, including how to compute the amount subject to withholding, refer to section 1.1445-8 of the regulations. Refer to Notice 2007-55 for guidance to clarify the treatment of certain distributions by REITs to foreign governments.

Generally, any distribution from a qualified investment entity attributable to gain from the sale or exchange of a U.S. real property interest is treated as such gain by the nonresident alien individual or foreign corporation receiving the distribution. For tax years beginning after October 22, 2004, any distribution by a REIT on stock regularly traded on a securities market in the United States is not treated as a gain from the sale or exchange of a U. S. real property interest if the shareholder did not own more than 5% of that stock at any time during the REIT's tax year. These distributions are included in the shareholder's gross income as a dividend from the REIT, not as a long-term capital gain.

U.S. Real Property Interest

The term U.S. Real Property interest means an interest 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. Suppose, on the date of disposition; the corporation did not hold any U.S. real property interests, and all the interests held 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. In that case, an interest in the corporation is not a U.S. real property interest.

After December 31, 2004, the sale of an interest in a domestically controlled qualified investment entity is not the sale of a U.S. real property interest. A qualified investment entity is any real estate investment trust (REIT) or regulated investment company (RIC). The entity is domestically controlled if, at all times during the testing period, less than 50% in value of its stock was held, directly or indirectly, by foreign persons. The testing period is the shorter of (a) the five years ending on the date of the disposition or (b) the period during which the entity was in existence.

Foreign Person

A Foreign Person is a nonresident alien individual, a foreign corporation that has not made an election under section 897(i) of the Internal Revenue Code to be treated as a domestic corporation, foreign Partnership, foreign trust, or foreign estate. It does not include a resident alien individual.

Transferor

The term Transferor means any foreign person who disposes of a U.S. real property interest by sale, exchange, gift, or other transfer. A transfer includes distributions to shareholders of a corporation, partners of a partnership, and beneficiaries of a trust or estate.

The owner of a disregarded entity is treated as the transferor of the property, not the entity.

Transferee

Transferee means any person, foreign or domestic, who acquires a U.S. real property interest by purchase, exchange, gift, or any other transfer.

Amount Realized

The amount realized by the transferor 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 the property is subject to immediately before and after the transfer.

U.S. Real Property Holding Corporation (USRPHC)

In general, a corporation is a U.S. real property holding corporation if the fair market value of the U.S. real property interests held by the corporation on any applicable determination date equals or exceeds 50 percent of the sum of the fair market values of its -