FIRPTA Certificate Withholding Rules

FIRPTA Certificate Withholding Rules

FIRPTA Certificate & Withholding Rules 

FIRPTA Certificate Withholding Rules & Foreign Seller Status: FIRPTA is Foreign Investment In Real Property Tax Act. The idea behind FIRPTA, is that the Internal Revenue Service wants to make sure it gets a chance to collect income tax for the sale of US property by nonresident aliens. In general, nonresident aliens do not have to pay capital gains tax on the sale of certain US assets. And, since real property is a US asset, there is a general misunderstanding in the marketplace that foreign sellers of US real property are not required to pay US tax on the income derived from the sale of US Property —  because it is capital gains; this is not true. In fact, US Real Property is one of the exceptions to the Capital Gains  tax rules. Nevertheless, sometimes a foreign seller of US real estate may still be able to avoid or minimize FIRPTA by way they FIRPTA Withholding Certificate. Let’s go through some of the basics of USRPI owners who have foreign seller status with respect to  FIRPTA.

US Real Property Interest (USRPI)

A US real property interest is more than just real estate per se.

As provided by the IRS:

      • A U.S. real property interest is an interest, other than as a creditor, in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of real property (such as farming machinery).

      • It also means any interest, other than as a creditor, in any domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or the 5-year period ending on the date of disposition (applicable periods). An interest in a corporation is not a U.S. real property interest if:

      • Such corporation did not hold any U.S. real property interests on the date of disposition,

      • All the U.S. real property interests held by such corporation at any time during the shorter of the applicable periods were disposed of in transactions in which the full amount of any gain was recognized, and

      • Such corporation and any predecessor of such corporation was not a RIC or a REIT during the shorter of the applicable periods during which the interest was held.

FIRPTA Withholding

To begin, in accordance with FIRPTA, certain monies are withheld at the time a nonresident alien sells US real property.

      • The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.

      • A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition (special rules for foreign corporations).

      • In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer, you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.

Certificate for FIRPTA Withholding

Even though in accordance with IRS rules for FIRPTA upwards of 15% is supposed to be withheld (remembering, that is 15% of the gross sale price and not 15% of the actual gain), the seller may be able to avoid FIRPTA by applying for a withholding certificate:

      • The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted pursuant to a withholding certificate issued by the IRS.

      • The transferee, the transferee’s agent, or the transferor may request a withholding certificate. The IRS will generally act on these requests within 90 days after receipt of a complete application including the Taxpayer Identification Numbers (TIN’s) of all the parties to the transaction.

        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.

      • A withholding certificate may be issued due to:

      • A determination by the IRS that reduced withholding is appropriate because either:

      • The amount that must be withheld would be more than the transferor’s maximum tax liability, or

      • Withholding of the reduced amount would not jeopardize collection of the tax,

      • The exemption from U.S. tax of all gain realized by the transferor, or

      • An agreement for the payment of tax providing security for the tax liability, entered into by the transferee or transferor.

Categories of a FIRPTA Withholding Certificate

      • All applications for withholding certificates are divided into six basic categories. This categorizing provides for specific information that is needed to process the applications. The six categories are:

        1. Applications based on a claim that the transfer is entitled to nonrecognition treatment or is exempt from tax,

        2. Applications based solely on a calculation of the transferor’s maximum tax liability,

        3. Applications under special installment sale rules,

        4. Applications based on an agreement for the payment of tax with conforming security,

        5. Applications for blanket withholding certificates, and

        6. Applications on any other basis.

FIRPTA is Complicated but Manageable

In conclusion, FIRPTA requires certain nonresident aliens who have an ownership interest in certain US real property to have a portion of the sales price withheld to ensure that the nonresident alien pays tax on the gain. Despite the fact that withholding is necessary, the IRS does provide several categories of types of transactions that may qualify for a withholding certificate to minimize or eliminate the withholding requirement.

About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and compliance. Contact our firm for assistance.