A foreign “person” disposing of an interest in U.S. real property may be subject to the Foreign Investment in Real Property Tax Act (FIRPTA) tax withholding rules. For these purposes, “person” can mean an individual, a business, or certain trusts.
Do you meet the requirements?
The following three factors will determine the applicability of FIRPTA withholding on the disposition of U.S. real property:
- The transferor is a foreign person. The presence of a taxpayer identification number (TIN) or a Social Security number (SSN) has no bearing on whether the seller is a foreign person or a U.S. person. For someone who is neither a U.S. citizen nor a green card holder, the “substantial presence test” is used to determine whether the individual is a foreign person or not.
- There has been a disposition. For purposes of FIRPTA, a disposition includes a sale or exchange, liquidation, redemption, distribution, capital contribution, and gift.
- The asset being disposed of is a U.S. Real Property Interest (USRPI). This includes a direct ownership interest in U.S. real property and U.S. real property holding corporations (USRPHC).
How is the FIRPTA withholding on the disposition of U.S. real property determined?
If, based on the requirements above, FIRPTA applies, upon the disposition of the USRPI, you will be subject to a 15% FIRPTA tax withholding of the amount realized (generally the total consideration received by the seller, including cash, other property received, and liabilities assumed by the buyer) on the disposition unless an exception to withholding applies. If the amount realized on the disposition of a USRPI is $300,000 or less and the buyer intends to use the USRPI as a personal residence, the FIRPTA withholding does not apply. Additionally, in cases where the property is acquired as a personal residence for a price of $1 million or less, the withholding tax rate is reduced to 10%.
In cases where FIRPTA applies, the buyer acts as the withholding agent and is responsible for filing Form 8288 and Form 8288-A with the IRS to report and remit the amount withheld by the 20th day following the date of transfer. The tax is typically withheld from the closing proceeds.
How do you claim a credit for the amount withheld?
Foreign transferors of USRPI are subject to U.S. tax on the disposition. In general, the FIRPTA withholding will likely be greater than the U.S. federal income tax liability. Transferors are able to claim a credit against their U.S. tax liability for the amount of FIRPTA withholding. Upon receipt of Form 8288 and Form 8288-A, the IRS will provide the transferor with a stamped Copy B of Form 8288-A, which must be attached to the filed U.S. income tax return (such as Form 1040-NR or 1120-F).
While the intention of FIRPTA is to treat foreign persons the same as U.S. persons who transfer USRPI, a foreign transferor can apply for a withholding certificate to reduce or eliminate FIRPTA withholding on dispositions of USRPIs. In cases where the foreign transferor is not able to obtain a withholding certificate on or before the closing date of the disposition, a request for an early refund can be made instead of waiting to file the annual income tax return. Historically, the IRS responded to these applications within 90 days. However, due to COVID backlogs, the process has been taking much longer.