Understanding FIRPTA Withholding Rules

The Foreign Investment in Real Property Tax Act (FIRPTA) mandates that most foreign sellers of U.S. real property pay capital gains tax on their profits. To collect the tax, buyers must withhold 15% of the purchase price and send it to the IRS. When the foreign seller files a U.S. tax return, they subtract the amount withheld from any tax due.

Who Must Follow FIRPTA Withholding?

FIRPTA withholding applies when the seller of U.S. real property is a “foreign person.” This includes:

• Nonresident aliens
• Foreign corporations that opt out of domestic status
• Foreign partnerships, trusts, and estates

A “U.S. person” includes:

• U.S. citizens
• Resident aliens (e.g., green card holders)
• Domestic corporations, partnerships, estates, and trusts

When a foreign person and a U.S. person jointly own and sell U.S. real property, the buyer withholds FIRPTA taxes only on the foreign person’s portion of the purchase price. For a married couple, usually allocate 50% of the purchase price to each spouse unless evidence suggests otherwise.

What Real Property Is Subject to FIRPTA Withholding?

FIRPTA withholding applies to the sale or other disposition (e.g., gift, exchange, liquidation) of an interest in real property located in the U.S. or the U.S. Virgin Islands. This includes:

• Land and natural products of the land (e.g., crops, timber, mines)
• Buildings and other permanent structures
• Options to purchase land, buildings, or other improvements to real property
• Personal property associated with the use of real property (e.g., movable walls, machinery)

The rules also apply to the transfer of an interest in a domestic corporation considered a U.S. real property holding corporation (USRPHC) during the previous five years or the period the seller held the interest, whichever is shorter.

Exceptions to FIRPTA Withholding Requirements

Several exceptions exist to the FIRPTA withholding rules. Withholding does not apply in these situations:

• Purchase of residence for $300,000 or less: If you buy U.S. real property for use as your primary residence and the sale price is $300,000 or less, no withholding takes place.
• Certification of nonforeign status: Withholding does not apply if the buyer receives a signed certification from the seller stating they are not a foreign person. However, withholding must occur if the buyer knows the certification is false.
• Sale of interest in a publicly traded corporation: FIRPTA withholding does not apply to the sale of an interest in a domestic corporation if any class of its stock is regularly traded on an established securities market.
• Statement of non-U.S. real property interest: Withholding does not apply if the corporation provides a statement saying the interest is not a U.S. real property interest, dated 30 days or less before the sale.
• Nonrecognition of gain or loss: Withholding does not apply if the seller sends a notice to the buyer stating that no gain or loss will be recognized due to a tax code provision (e.g., 1031 exchange) or a U.S. tax treaty. The IRS must receive a copy of the notice within 20 days after the sale.
• Withholding certificate issued by the IRS: The IRS can issue a certificate excusing FIRPTA withholding if the seller is exempt from U.S. tax or an agreement for tax payment exists with the IRS.
• Seller isn’t paid: Withholding does not apply if the seller realizes $0 on the sale, such as in a gift transfer.
• Options to acquire property: Withholding is necessary on the sale or exercise of an option to purchase U.S. real property, but it is not required for any amount paid upon the grant or lapse of an option.
• Property acquired by the government: Withholding does not apply if the U.S. government, a state or possession, a political subdivision, or the District of Columbia acquires the property.

Amount of FIRPTA Withholding

When FIRPTA withholding applies, the buyer withholds 15% of the total amount realized by the seller. The amount realized includes:

• Cash paid or to be paid (principal only)
• The fair market value of other transferred property, or property to be transferred
• Any liability assumed by the buyer or to which the sold property is subject immediately before and after the sale

The withholding rate drops to 10% if the U.S. real property is purchased for use as a residence and is sold for $1 million or less. The IRS can issue a withholding certificate to reduce the withholding rate if the 15% rate exceeds the seller’s maximum tax liability or if reduced withholding does not jeopardize tax collection.

Reporting and Paying Withheld FIRPTA Taxes

If you buy U.S. real property from a foreign person, use IRS Form 8288 to report FIRPTA withholding. Complete Form 8288-A for each foreign person subject to withholding. You generally have 20 days after the sale to submit the forms.

Both the buyer’s and seller’s taxpayer identification numbers must be included on Form 8288-A. Foreign sellers who don’t qualify for a Social Security number can request an ITIN using Form W-7.

Conclusion

FIRPTA withholding ensures that foreign sellers of U.S. real property pay the required capital gains tax. Understanding the rules, exceptions, and reporting requirements can be complex, so consult with a tax professional. Staying informed and compliant with FIRPTA withholding helps avoid penalties and ensures a smooth transaction.

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