FIRPTA: Withholding of Tax on Dispositions of United States Real Property
Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), the sale or other taxable disposition of United States real property by a foreign person is subject to income tax withholding. U.S. income tax treaties generally allow for such U.S. taxation. The withholding tax is imposed on the ‘withholding agent’, which usually is the buyer. The main purpose of FIRPTA is to ensure collection of tax on the gain realized on the sale of United States real property by a foreign person.
The withholding obligation is imposed on the withholding agent. The withholding agent is the buyer or other transferee of United States real property. A withholding obligation applies to individuals, foreign and domestic corporations, qualified investment entities, and the fiduciary of certain trusts and estates. If there are two or more buyers, each is obligated to withhold. However, the obligation of each will be met if one of the joint buyers withholds and transmits the required amount to the IRS.
A foreign person is defined to mean any person other than a United States person. A United States person is a U.S. citizen or resident alien (Green Card holder, person meeting the substantial presence test or elects to be treated as a U.S. person).
The buyer is required to determine if the seller is a foreign person or not. If the buyer fails to withhold when the seller is a foreign person, they buyer may be liable for the tax required to be withheld.
The withholding agent is required to withhold 10 or 15 percent of the amount realized on the disposition. The general rate was increased from 10 percent to 15 percent effective February 17, 2016. The rate still is 10 percent for real property sold after this date if the amount realized does not exceed $1,000,000 and the buyer uses the property as a personal residence.
If one or more individuals acquire U.S. real property for use as a residence and the amount realized (which in most cases is the sales price) is $300,000 or less, no withholding is required.
The buyer is required to report the amount withheld within 20 days of the date of the disposition by filing Form 8288 with the IRS. The buyer is also required to transmit the amount withheld to the IRS. Attached to Form 8288 is Form 8288-A. The buyer sends copies A and B of the Form 8288-A to the IRS together with Form 8288 and keeps copy C of Form 8288-A. The IRS stamps copy B of the Form 8288-A and sends it to the seller. When the seller files his nonresident U.S. tax return (Form 1040NR) the stamped copy B is proof of the amount of tax withheld on the sale of the U.S. real property on the seller’s behalf. If the tax on the gain realized on the disposition is less than the amount withheld (as shown on copy B of the Form 8288-A), the difference will be refunded.
Form 8288-B to Apply for a Withholding Certificate to Reduce or Eliminate Withholding
When a foreign person sells U.S. real property, the gain realized on the disposition is taxable in the United States. The tax on the gain may be less than the amount withheld by the buyer under FIRPTA. If the U.S. real property is sold at a loss, there may not be any U.S. tax liability, even though tax has been withheld on the disposition. By filing Form 8288-B on or before the date of transfer, the seller can apply for a withholding certificate to reduce or eliminate withholding on the disposition of U.S. real property if the application is based on a calculation that shows the seller’s maximum tax liability is less than the tax otherwise required to be withheld.
Please contact us with any questions you may have about the sale of your U.S. real property. We can assist you with the application for a withholding certificate by preparing and filing Form 8288-B. This will reduce the withholding on the sale of your U.S. real property. We can also prepare and file your nonresident income tax return (Form 1040NR). Our tax professionals also speak Dutch and German.