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FIRPTA Withholding of Tax on Dispositions of United States Real Property Interests

FIRPTA Withholding of Tax on Dispositions of United States Real Property Interests
Ines Zemelman, EA
05-Dec-16

What is FIRTPA withholding

The disposition of investment in U.S. real property 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 apply).

What is FIRTPA withholding?

The disposition of a U.S. real property interest by a foreign person is subject to FIRPTA income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.

 

Who is a withholding agent?

If the buyer is purchasing real estate from a foreign seller, the buyer is required to complete Forms 8288 and 8288-A, and submit them to the IRS. The purpose of these forms is to report the withholding amount of the purchase and then pay it to the IRS at the right time.

How to report property jointly owned by U.S. and foreign person

If the property was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.

What is the foreign seller ITIN requirement?

Foreign seller without a U.S. tax identification number (Social Security or ITIN) must obtain an ITIN in order to pay the IRS and in order to request a refund of excessive FIRTPA withholding.

How to receive a refund of FIRTPA Withholding?

A foreign person may be entitled to a refund for taxes withheld by filing Form 1040NR, U.S. Nonresident Alien Income Tax Return. A foreign person is entitled to a refund of taxes withheld if his/her total U.S. tax liability is less than amounts withheld or previously paid.

What is FIRTPA withholding

In most cases, the transferee / buyer is the withholding agent. If the buyer is purchasing real estate from the foreign seller, he needs to fill the forms 8288 and 8288-A, and submit them to the IRS. The purpose of these forms is to report the withholding amount of the purchase and then pay it to the IRS at the right time.

Who is the Transferor?

The term Transferor means any foreign person that disposes of a U.S. real property interest by sale, exchange, gift, or any other transfer. A transfer includes distributions to shareholders of a corporation, partners of a partnership, and beneficiaries of a trust or estate.

The owner of a disregarded entity (LLC) is treated as the transferor of the property, not the entity.

Who is the Transferee?

The term Transferee means any person, foreign or domestic, that acquires a U.S. real property interest by purchase, exchange, gift, or any other transfer.

What is the Foreign Seller ITIN Requirement?

Foreign seller without a U.S. tax identification number (Social Security or ITIN) must obtain an ITIN in order to pay the IRS and in order to request a refund of excessive FIRTPA withholding.

ITIN can be obtained by filing Form W-7.

How to report Property Jointly Owned by U.S. and foreign person?

If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor. For example, if property is jointly by a married couple where one spouse is a U.S. person and other is foreign, FIRTPA withholding is based on 50% of the amount realized on the disposition.

How to Get a Refund for FIRTPA Withholding?

The amounts withheld are credited towards the foreign person’s U.S. tax liability and may be greater than the actual tax liability due on the disposition of the property. A foreign person may be entitled to a refund for taxes withheld under section IRC § 1445 by filing Form 1040NR, U.S. Nonresident Alien Income Tax Return. A foreign person is entitled to a refund of taxes withheld if his/her total U.S. tax liability is less than amounts withheld or previously paid.

If the refund request is timely, the IRS would verify Form 1040NR accurately reported the gain (or loss) on the disposition of the real property and the amount of withholding taxes imposed on the transaction.

Ines Zemelman, EA