WHAT IS FIRPTA?
FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980. Contrary to popular belief, this act is not a tax at all, it’s a withholding. Just as the title implies, this withholding was designed to ensure that foreign owners of U.S. property pay their share of taxes on the profits (or gain) when they sell.
FIRPTA withholding amount effective February 16, 2016. Section 324 of the PATH ACT changes the base FIRPTA withholding rate to fifteen percent (15%). 15% Withholding Applies for Sales up to and Including $300,000 and Purchaser Does NOT Intend to Occupy the Property as a Residence If the gross sales price is $300,000.00 or less and the purchaser does not intend to occupy the property as a residence, then the 15% withholding rate applies.
10% Withholding Applies for Sales between $300,000 and$1,000,000 With Intent to Occupy as a Residence
When the purchaser intends to use the property as a residence and the gross sales price is greater than $300,000.00 but no more than $1,000,000.00, the withholding rate shall be 10% of the gross sales price. The purchaser has to intend to occupy the property as his/her residence 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 purchase.
15% Withholding Applies for Sales in Excess of $300,000 When the Purchaser Does NOT Intend to Occupy the Property as a Residence
Who is responsible for the withholding?
Foreign persons are generally exempt from U.S. tax on capital gains. Under FIRPTA, however, foreign persons are subject to tax on gains from disposition of U.S. real property interests (USRPIs).
- An interest in property is any direct equity interest in the property, such as a fee simple ownership, but does not include interests solely as a creditor. Thus, co-owners of property each hold an interest in the property, but a bank holding a mortgage does not.
- Real property is land, buildings, and land improvements. Generally, whether property is or is not real property is determined under U.S. tax law concepts, not state law. Thus, gas pumps and awnings at gas stations are not real property under U.S. Federal tax law, even though they may be realty under state law. For FIRPTA purposes, real property also includes unsevered natural products of the land (e.g., oil and gas in place in the ground, uncut timber, unharvested crops) and personal property associated with the use of real property.
- A United States real property interest (USRPI) includes shares of a U.S. real property holding corporation (USRPHC). A USRPHC includes any U.S. corporation if more than 50% of such corporation’s assets were USRPIs at any testing date. Disposition of an interest in a USRPHC is subject to the FIRPTA tax and withholding but is not subject to state income tax. This may be compared with the disposition of a USRPI owned directly, which is subject to the lower federal capital gains rate but is also subject to the state income tax.
FIRPTA rules require that a buyer withhold 15% of the gross purchase price of the property at the time of closing when they buy US real property from a foreign person.
Who is considered a foreign person?
You are considered a foreign person if you, the “Seller” of US real estate, are a:
- Non-resident alien individual
- Foreign corporation that has not made an election to be treated as a domestic corporation
- Foreign partnership
- Foreign trust, or foreign estate
*A resident alien, electing to be treated as a US resident, is NOT considered a foreign person according to FIRPTA
** If US real estate is held through an LLC taxed as a partnership different withholding requirement apply at the partnership level that may supersede the FIRPTA withholding and should be discussed with a tax professional. We can assist you in reviewing withholding requirements for and LLC.
As of February 17, 2016, buyers of U.S. real property interests are required to withhold 15% of the full sales price on any purchase of a USRPI; an increase from the previous 10% rate. However, the 10% withholding rate does remain in effect for personal residences valued above $300,000 and below $1 million. This is subject to only four exceptions. Withholding is not required:
- By a purchaser for use as a residence for a price $300,000 or less, OR
- Where the purchaser receives a statement from the seller that the seller is a not a foreign person.
- Upon acquisition of an interest in a nonpublicly traded domestic corporation where the corporation provides the required affidavit.
- Upon acquisition of shares of a publicly traded corporation.
To the extent withholding is required, the amount of withholding may be reduced below 10% of the full price only upon certification by the IRS that a reduced amount applies. Such certification is permitted only if the seller applies to the IRS for reduced withholding by filing Form 8288-B (Withholding Certificate) no later than the closing date of the sale. The certification will specify the proper amount of withholding, subject to the stated closing price.
Penalties apply to a purchaser who fails to withhold, file Form 8288 with the IRS, or pay the required withholding within 20 days of the sale.
Exceptions from FIRPTA Withholding
Generally you do not have to withhold in the following situations; however, notification requirements must be met:
- You (the transferee) acquire the property for use as a residence and the amount realized (sales price) is not more than $300,000. You or a member of your 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. When counting the number of days the property is used, do not count the days the property will be vacant. For this exception, the transferee must be an individual.
- The property disposed of is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded corporations.
- The disposition is of an interest in a domestic corporation and that corporation furnishes you a certification stating, under penalties of perjury, that the interest is not a U.S. real property interest. In most cases, the corporation can make this certification only if either of the following is true.
- During the previous 5 years (or, if shorter, the period the interest was held by its present owner), the corporation was not a USRPHC.
- As of the date of disposition, the interest in the corporation is not a U.S. real property interest by reason of section 897(c)(1)(B) of the Code. The certification must be dated not more than 30 days before the date of transfer.
- The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor’s name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).
- The transferor can give the certification to a qualified substitute. The qualified substitute gives you a statement, under penalties of perjury, that the certification is in the possession of the qualified substitute. For this purpose, a qualified substitute is (a) the person (including any attorney or title company) responsible for closing the transaction, other than the transferor’s agent, and (b) the transferee’s agent.
- You receive a withholding certificate from the Internal Revenue Service that excuses withholding. See Steps To Obtaining a Withholding Certificate , later.
- The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the Ogden Service Center, P.O. Box 409101, Ogden, UT 84409.
- The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
- The property is acquired by the United States, a U.S. state or possession, a political subdivision, or the District of Columbia.
- The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale, exchange, or exercise of that option.
- The disposition is of an interest in a publicly traded partnership or trust. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded partnerships or trusts.
What if I don’t have a US tax ID (ITIN)?
According to FIRPTA rules, both parties to the sale are required to have a US tax ID. We can help you or your client apply for such an ID.
Steps to obtain a withholding certificate
If the seller wished to reduce or eliminate the required withholding on the property sale, a withholding certificate is generally required prior to closing on the sale. The buyer is ultimately responsible for the 15% withholding and will want to make sure the proper documentation is in place before allowing a reduced amount of withholding. The buyer and seller will usually engage a title company in a fiduciary role to make sure all requirements are met. If the seller has timely filed the 8288-B form and is still awaiting a reply from the IRS at the time of sale, the title company should hold the withholding tax in trust for 90 days or until a response is received from the IRS. If no certificate of reduced withholding has been received in 90 days, then the full original required withholding amount (either 10% or 15% of the gross selling price) should be submitted to the IRS. If the IRS has accepted the Form 8288-B and issues a certificate of reduced withholding, the title company will then submit the withholding amount provided on the exemption certificate to the IRS and release the remaining funds to the seller within 20 days of receipt. If the IRS rejects the 8288-B and requires withholding, the title company must also remit the full required withholding amount to the IRS.
Please note, regardless of whether the nonresident seller owes tax or does not owe tax, they are still required to obtain a U.S. tax identification number (ITIN) and file a nonresident income tax return to report the sale. If the seller does not have a U.S. tax identification number, they must apply for one at the time of filing Form 8288-B. If the seller is an individual who does not qualify for a Social Security Number, they will need to apply for an Individual Tax Identification Number (ITIN) by attaching Form W-7, Application for IRS Individual Taxpayer Identification Number, to the 8288-B. If the seller already has a valid ITIN, the 8288-B will be filed at the address in Ogden, Utah provided in the 8288-B instructions. If a W-7 is required, the forms needed must be filed at the IRS address in Austin, Texas provided in the W-7 instructions.
Caballero Fierman Llerena & Garcia, LLP can help a foreign real estate seller or foreign real estate investor navigate real estate and closing terminology, assist with communication between buyers and sellers, their agents and their lenders and ensure both parties are meeting the legal requirements of FIRPTA. We can assist in the sellers obtaining an ITIN and preparing all FIRPTA required forms.