FIRPTA Withholding – Top 10 Questions

What is FIRPTA withholding?

The acronym stands for the Foreign Investment in Real Property Tax Act and is used to describe withholding of tax on the sale of real estate by a foreign person.

Who is a Foreign Person?

A foreign person is a nonresident alien who is neither a U.S. citizen nor a green-card holder and who does not meet the IRS prescribed substantial presence test. The term also refers to a foreign corporation (a corporation not incorporated in the U.S.), foreign partnership, foreign trust, or a foreign estate.

Am I a withholding agent?

Every person who controls, holds custody of, receives, disposes of, or pays any item of income to a foreign person that is subject to foreign withholding is a withholding agent. Attorneys for both buyers and sellers can find themselves liable. FIRPTA defines agent as “any person who represents the transferor or transferee in any negotiation relating to the transaction or in settling the transaction.”

Which payments are subject to withholding?

Sales proceeds realized upon the disposition of a U.S. real property by a foreign person are subject to FIRPTA withholding. NOTE: Other types of income payments to foreigners may be subject to withholding if income is from sources within the United States, and it is fixed or determinable, annual or periodical (FDAP) income. Examples of such payments are: dividends, interest, real property income such as rents, and royalties.

How much do I need to withhold and when?

Generally, you must withhold at the time you pay the income to the foreign person. Sales proceeds from real estate transfers are subject to 15% withholding.

Can FIRPTA withholding be avoided?

FIRPTA is avoided in case of residential sales under $300,000 if the buyer signs an affidavit stating that the property will be their personal residence and the buyer or buyer’s family member will occupy the property at least 50% of the number of days the property is in use during each of the first two 12 month periods following the date of purchase.

Can FIRPTA withholding rate be reduced?

Sales of property for the use by the buyer as a personal residence are subject to reduced withholding of 10% of the amount realized if the sale is above $300,000 but less than $1 million. Additionally, FIRPTA rate of withholding may be reduced (even to $0) if the foreign seller secures a withholding certificate from the IRS. The application for reduced withholding certificate requires a calculation of the adjusted cost basis of the seller’s property, calculation of taxable gain, and tax on the sale. Consult an experienced tax professional before your closing to determine if a withholding certificate is a viable option.

What if seller holds a property in a domestic LLC?

Single member LLCs are disregarded by the IRS. Accordingly, the withholding rules apply in the same manner if the individual owned the real estate out right. Domestic multi member LLCs with foreign owner(s) are taxed either as Corporations or Partnerships and are stand alone “persons” in the eyes of the IRS. As such domestic entities, they are generally not subject to FIRPTA. However, some of the domestic entities may be caught by FIRPTA rules if they are considered a U.S. real property holding corporation (USRPHC).

How do I submit the withholding to the IRS?

FIRPTA withholding is required to be submitted to the IRS within 20 days of the closing together with IRS Form 8288, U.S. Withholding Tax Return for Disposition 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.

Are tax ID numbers required for all parties?

Yes. IRS forms submitted with FIRPTA withholding require identifying numbers for the buyer and the seller. If your foreign seller does not have a U.S. tax ID number, an application for ITIN (form W-7) must be submitted together with the withholding forms. James Moore & Company is your local IRS certified acceptance agent and is authorized to assist individuals with the ITIN application process by reviewing the necessary documents, authenticating the identity when able and forwarding the completed forms to the IRS.

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