The sale of U.S real properties, FIRPTA and the Impact on Non-Resident Aliens

The sale of U.S real properties, FIRPTA and the Impact on Non-Resident Aliens

What Is the Foreign Investment in Real Property Act (FIRPTA)?

Purchasers and Foreign Sellers of U.S real estate may have heard of FIRPTA, but most are unclear on exactly what it is and how it may impact them. If that sounds like you, you’re in luck. Here are the answers to the most common questions about FIRPTA.

What Is FIRPTA?

The Foreign Investment in Real Property Act (FIRPTA) is a law that imposes a tax withholding and reporting obligation on buyers, as well as an ultimate tax filing and payment obligation on foreign persons selling U.S. real property interest (USRPI).

The withholding requirement serves as an incentive for foreign sellers to file the appropriate U.S. tax return (i.e., Form 1040NR, or Form 1120-F) to report income from the sale and claim a credit for the withheld funds.

What Is U.S. Real Property Interest (USRPI)?

USRPI refers to having any direct or indirect interest in U.S. real property. Real property includes:

  • Land
  • Buildings
  • Inherently permanent structures (e.g., bridges and silos)
  • Unharvested crops
  • Uncut timber
  • Natural deposits before extraction
  • Any personal property associated with real property

What Does FIRPTA Require?

FIRPTA requires that anyone (whether U.S Person or Foreign Person) who buys USRPI from a foreign seller must withhold a tax equal to 15% of the sales price unless:

  1. An exception applies, or
  2. The seller produces an IRS withholding certificate that reduces or eliminates the FIRPTA withholding tax

This FIRPTA withholding tax is required even if the seller sells the real property at a loss.

How Does the Buyer Submit the FIRPTA Withhold Tax?

When a buyer is required to remit the standard FIRPTA withholding tax, they must withhold 15% of the sales price. Then, the buyer must file Form 8288 and Form 8288-A with the IRS per Reg. §1.1445-1(c).

And if the property is owned by two more foreign persons, the withholding agent/buyer must list all foreign joint owners on a separate form 8288-A.

An ITIN or SSN is not required to withhold these taxes, but it is strongly recommended. If an ITIN/SSN does not exist at the time of filing 8288, 8288-A and remittance, The seller will not receive a stamped copy B of Form 8288-A, which will prevent or probably delay them from claiming a timely credit for the FIRPTA tax.

When Is the FIRPTA Withholding Tax Due?

The buyer must withhold the FIRPTA tax at the time of the sale or closing. The payment must then be remitted to the IRS within 20 days following closing.

What If the Buyer Doesn’t Withhold or Remit the FIRPTA Tax?

If the buyer fails to withhold or pay the required FIRPTA tax by the due date, the IRS may impose penalties for failure to file Form 8288 when due, and for failure to pay the withholding when due.

In addition, IRC § 1461 and Treas. Reg. § 1.1445-1(e) impose liability on the buyer for the tax which it was required to withhold.

What Are the Exceptions to FIRPTA Withholding?

There are certain exceptions to FIRPTA withholding. For some examples, the buyer is not required to withhold any amount for the real property sales if:

  • The seller certifies under penalty of perjury that they’re a U.S. person
  • The sale is of a share of a class of stock that is regularly traded on an established securities market
  • The buyer receives a qualifying statement from the IRS stating that there is an agreement with the seller or an exemption in this case
  • The buyer acquired the property for their use as a personal residence, and the sale or contract price does not exceed $300,000

This is not an exhaustive list. Depending on the details of the sale, other exceptions may apply.

What Is a Withholding Certificate?

In some cases, a foreign seller can apply for a withholding certificate to reduce the amount of withholding—or eliminate it entirely. This is done by submitting Form 8288-B.

So how does the seller know if they qualify for a withholding certificate? Well, there are 6 broad categories under which a withholding certificate may be issued. But by far, the most common category is based on a calculation of the seller’s maximum tax liability with respect to the sale.

Specifically, if the standard withholding amount exceeds the foreign sellers maximum tax liability, they may be able to request for a reduced withholding from the IRS.

As a foreign seller, if you think you may qualify for a withholding certificate, the IRS requests that you submit your Form 8288-B at least 90 days (in a normal year not affected by COVID-19) before the closing date of the sale.

Note: You will need a valid Individual Tax Identification Number (ITIN) to apply for a withholding certificate. If you don’t already have an ITIN, you can complete and attach a Form W-7, and its related identity documentations to your completed Form 8288-B.

(When filling out Form W-7, select “Reason H: Other-Exception 4, Disposition of Real Property.”)

What Should the Seller Do After the Buyer Has Filed Form 8288 and Form 8288-A?

Once the buyer has already withheld the FIRPTA tax and filed Form 8288 and Form 8288-A, there are a few steps the seller should take.

If the tax that the buyer withheld ends up exceeding the seller’s actual liability, the foreign seller will be entitled to a refund from the IRS. The seller must file Form 1040NR to report the sale of the property, regardless of whether they made a gain or loss on the sale. They should also attach a copy B of Form 8288-A to this tax return.

Get Expert Help with Your U.S. Taxes from a Licensed CPA

Hopefully, this article has helped you understand the FIRPTA tax and how it impacts Purchasers and Foreign Sellers of U.S real properties. If you still have questions, however, I’d be happy to answer them!

I’m a licensed CPA and an IRS Certified Acceptance Agent with years of experience helping foreign business owners with their taxes. Just contact me, and I’ll be happy to answer all of your questions. In fact, I can even manage and file your taxes on your behalf so you can focus on other things.

As a certified acceptance agent, I can assist with your application for individual taxpayer identification numbers (ITINs), as well as the application for a withholding certificate (Form 8288-B, computations, and supporting documents) to reduce or eliminate your withholding.

Click here to let me know how I can help you today.

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***Disclaimer: I am a tax accountant and a CPA licensed in Massachusetts , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**

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