Foreign Investment in Real Property Tax Act
FIRPTA Withholding: Tax on non-resident aliens selling real property in the U.S.
The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 authorizes the United States to tax foreign persons who are nonresident aliens selling U.S. real property interests. A U.S. real property interest includes sales of interests in parcels of real property.
Persons purchasing U.S. real property interests (transferee) from nonresident aliens (transferor), certain purchasers’ agents, and settlement officers are required to withhold 10% of the amount realized (the purchase/sales price of the real estate going to transferor) and remit that amount to the Internal Revenue Service within 20 days of the transaction.
Withholding is intended to ensure U.S. taxation of gains realized on disposition of real property interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer, you must find out if the transferor/seller is a foreign person/nonresident alien. If the transferor is a foreign person/nonresident alien and you fail to withhold, you may be held liable for the tax.
Coverage of FIRPTA: Definition of “Nonresident Alien” (Foreign Person)
A nonresident alien is defined for federal income tax purposes as an individual who is neither a U.S. citizen nor a resident of the U.S. within the meaning of the Internal Revenue Code. An alien individual is a resident of the U.S. for federal income taxes if he or she:
- Has been issued a green card (been admitted as a Lawful Permanent Resident in the U.S.) at any time during or prior to the calendar year; or
- Has maintained a “substantial presence” in the U.S., which means the alien (a) is physically present in the U.S. for 183 days or more during the calendar year or (b) if the alien is physically present in the U.S. for at least 31 days during the current year, the alien may be treated as a resident in the current year by the following calculation:
- Each day of presence in the current year is counted as a Full Day;
- Each day of presence in the 1st preceding year is counted as 1/3 of a Day;
- Each day of presence in the 2nd preceding year is counted as 1/6 of a Day
- If the total of (1) + (2) + (3) is 183 days or more, the alien may be a U.S. tax resident unless the alien files certain required information with the IRS to claim the benefit of any relevant exception.
- If the foreign person is neither a U.S. citizen nor falls within description (1) or (2), he or she is a nonresident alien and is subject to FIRPTA withholding unless an exception applies.
- Home Use/$300K Exemption
One of the most common exemptions to FIRPTA withholding is that the transferee is not required to withhold tax in a situation in which the transferee purchases real estate for use as his/her home and the purchase price is not more than $300,000. In this case, the transferee or a member of his family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer.
- Withholding Certificate
Another exception from FIRPTA withholding occurs when the IRS issues a withholding certificate. The transferee, the transferee’s agent, or the transferor may request a withholding certificate and the IRS will generally act on these requests within 90 days after receipt of a complete application (Form 8288-B), including the Taxpayer Identification Numbers (TINs) of all parties to the transaction.
Form 8288-B requires a description of the real property interest being sold, the sales price, a calculation of the maximum tax owed, and evidence that the seller has no unsatisfied FIRPTA withholding obligations with respect to the purchase of the real property interest.
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 prior to the transfer. If the withholding certificate is obtained, the nonresident alien must file a U.S. tax return for the year of sale and pay the appropriate amount of tax due at that time.
Please note that if the principal purpose of a transferee’s applying for a withholding certificate is to delay remitting the withheld tax to the IRS, the transferee will be subject to interest and penalties.
Additional exceptions from FIRPTA withholding exist but most involve transactions related to U.S. real property holding companies or the government acquisition of property.
For additional information about those transactions, applicable forms, the withholding certificate application process, the effects of U.S. income tax treaties with other countries on withholding, and more, please visit www.irs.gov.
When the property sales price over $300,000 and your client is a foreign person i.e. does not participate in the US tax system.
The amount realized typically is the sales or contract price. Please note that the outstanding amount of any liability assumed by the buyer does not reduce the amount realized. If the property is owned jointly by foreign and non-foreign persons, the amount realized is to be allocated among the owner based on capital contributions, with spouses treated as having contributed 50% each. Generally, the amount to withhold is 10% of the amount realized, unless the seller is a corporation, partnership, trust, or estate in which case the amount may be 35%.
Apply for an exemption by filing an IRS Form 8288 on or before date of settlement OR pay 10% of the sales price directly to the IRS via the closing agent.
NOTE: If your client does not have a tax identification or social security number, then your client will also be required to file a W-7 form at the time of either filing for an exemption or paying the tax.
Yes, the requisite forms can be filed as soon as you have a ratified contract. You will need to get the purchaser’s information i.e. SSN, address, etc., in order to do so.
If the seller is paying 10% of the sales price as part of settlement, then the settlement agent/attorney will file the forms and pay the money directly to the IRS.
If the seller wishes to file for an exemption, then the seller hires the settlement agent, a tax attorney or an accountant to file the forms. There is usually an additional fee to handle the exemption filings.
A resident alien, for purposes of FIRPTA, is not a foreign person. FIRPTA defines a foreign seller as a non-resident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust or estate. There are two ways to determine if a person qualifies as a resident alien under FIRPTA:
- 1. If a person has been issued an alien registration card (“green card”) or
- 2. The substantial presence test that requires a person be physically present in the United States for a certain number of days a year. 183 days (pursuant to IRS Code).
Several exceptions do apply and exempt the buyer from withholding. Here is a partial list of the most common exceptions in a real property transfer:
- 1. The property is purchased for $300,000.00 or less and is to be used by the buyer as his or her residence. The test for a residence is if the buyer is to reside in the property for at least 50% of the days in the next two 12 month periods.
- 2. The seller provides to the buyer a Non-Foreign Status Certification containing the transferor’s U.S. taxpayer identification number and stating that the transferor is not a foreign person. The buyer need not investigate the validity of the certification, but will be held liable if he or she has actual knowledge that it is false.
- 3. The seller provides to the buyer a withholding certificate from the IRS that excuses or lowers the withholding amount.
- 4. No consideration is paid (for example the property was transferred as a gift).
- 5. An option to acquire real property is signed (however, withholding is required on the sale when the option is exercised).
- 6. The purchaser is the United States, a U.S. state or possession or political subdivision, or the District of Columbia.
- 7. The seller provides a notice signed under penalties of perjury stating that the seller is not required to recognize gain or loss on the transfer because of a nonrecognition provision of the Internal Revenue Code or a provision in a U.S. tax treaty.
Typically it takes 90 days to receive a certificate of exemption, partial exemption or non-exemption.
The short answer is that if your seller was physically present in the United States for at least 183 days in the previous calendar year, he or she qualifies as a resident alien and is not subject to FIRPTA withholding. Even if the seller does not meet this requirement, he or she might still be exempt from FIRPTA, by using the complicated formula found in IRS Code § 7701 that states that a seller qualifies as a resident alien if
- 1. The seller was present in the United States on at least 31 days during the calendar year, and
- 2. (the number of days present in current year) + (the number of days present in preceding year x 1/3) + (the number of days present in 2nd preceding year x 1/6) equals or is greater than 183.
Generally, these forms need to filed with the IRS within 20 days of the date of transfer, defined as the date consideration is first paid, excluding earnest money or deposits.
Failure of the buyer to withhold the proper amount may cause the buyer to be liable for the payment of the tax plus penalties and interest as well as possibly making the buyer subject to criminal penalties.
If the seller is foreign and does not pay the requisite tax or file for exemption; then your purchaser is on the hook for paying the tax.
NOTE: If both the seller and the purchaser are foreign, your purchaser will be required to file a W-7 form if your purchaser does not already have a tax identification or social security number. Your purchaser’s tax identification number must be on the seller’s form whether filing for exemption or filing to pay the tax.
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