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.

The buyer must use IRS Forms 8288 and 8288-A to report and pay to the IRS any tax withheld on the purchase of U.S. real property interests.

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.

If you need any further information or need the forms, visit IRS webpage on foreign persons or contact our office.