Foreign Investment in Real Property Tax Act (FIRPTA) Withholding

The Foreign Investment in Real Property Tax Act (FIRPTA) is a federal law that requires foreign persons to pay taxes on their gains and income from U.S. real estate investments. When such transactions occur, FIRPTA withholding is required from the transferee – typically the buyer. Under IRC Section 1445, generally, the stipulated rate of FIRPTA withholding is between 10% to 15% of the gross sale price or the total amount realized.

The foreign seller is still obligated to declare capital gains on the sale for U.S. federal income tax purposes, even if there is no withholding requirement. A foreign investor may be eligible for a reduced withholding rate under an applicable treaty between their country and the United States. However, that must be certified by the investor’s local tax authorities before it can be applied.

Who is Responsible for FIRPTA Withholding on the Sale of U.S. Property?

The buyer of a U.S. real estate property is typically responsible for the withholding and remittance to the IRS under the Foreign Investment in Real Property Tax Act (FIRPTA).

If FIRPTA applies, it requires that 15 percent of the total sales price be withheld by either the buyer or an intermediary (such as an escrow agent) who pays money from one party to another during a closing process. If this amount is not withheld, the buyer can be held liable for paying the IRS any additional taxes that may result from the sale. Thus, ultimately the buyer is responsible for FIRPTA withholding.

The buyer then submits the withholding taxes to the IRS along with Form 8288, which must be filed within 20 days of closing. The seller is responsible for reporting any gain or loss on their U.S. income tax return using Form 1040NR, US Nonresident Alien Income Tax Return. It’s important to note that FIRPTA withholding may not always be required; in certain cases, the seller may request a waiver from the IRS if they are eligible for such an exemption. That said, it’s critical to understand and comply with all applicable regulations relating to FIRPTA when undertaking any real estate transactions in the U.S., as failing to do so could result in significant penalties.

Exemptions from FIRPTA Withholding

Generally, when a non-resident alien or foreign corporation sells a U.S. real property interest (USRPI), the buyer must withhold 15% of the amount realized from the disposition unless an exemption applies. The seller can apply for a withholding certificate from the IRS to reduce or eliminate withholding.

The Internal Revenue Service (IRS) may allow exceptions to the FIRPTA withholding in the following circumstances:

The property was sold for less than $300,000 and used as a primary residence by the foreign seller. The seller or a member of the seller’s family must have occupied the property for at least 50% of the time during the two years ending on the date of sale.
The United States, a U.S. state, the District of Columbia, or a political subdivision acquires the property.
The person acquiring the property receives a withholding certificate from the Internal Revenue Service that exempts them from withholding.
The transferred property is of interest in a publicly traded trust or partnership. Nevertheless, this exemption does not apply to various dispositions of considerable non-publicly traded interests in publicly traded trusts or partnerships.
When a foreign seller realizes zero financial gain on transferring U.S. real property.
The seller issues the buyer a certification stating, under penalties of perjury, that the seller is indeed not a foreign person. The certification must detail the seller’s name, home address (or office address, in the case of an entity), and U.S. taxpayer identification number.
The disposition of an interest in a domestic corporation furnishes you with a certification stating that the interest is not a U.S. real property interest. Usually, the corporation can make this certification no more than 30 days prior to the transfer only if either of the following is true:

In the last five years, the corporation was not a S. Real Property Holding Corporation (USRPHC).
On the date of disposition, the interest in the corporation is not a U.S. real property interest because of section 897(c)(1)(B) of the Code.

The seller gives the buyer a written notice of exemption due to a non-recognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. Some gains or losses on the sale of U.S. real property are not recognized under the IRS Code; in such cases, the seller will issue a written notice of the exemption to the buyer.

Withholding Certificates Related to U.S. Real Property Interest

Once the application is made, the IRS will issue a certificate to the seller, which can be provided to the buyer. The seller must notify the transferee in writing that the withholding certificate has been applied for on the day of transfer or the day prior to the property transfer. The withholding certificate may be issued because of various reasons, including:

Withholding the reduced amount would not jeopardize the tax collection on the gain realized by the seller.
An agreement for tax payment providing security for the tax liability entered by the buyer or seller.

Essential features of FIRPTA Withholding Certificate Applications

The withholding certificate applicant must be capable of proving their basis in the property.
The IRS will usually process these requests within 90 days upon receipt of a complete application.
All parties must possess or, at best, apply for a US tax ID
When unable to obtain a withholding certificate before closing, the buyer is often left with an important decision: opt for sending funds immediately after closure or wait in anticipation of approval/rejection following application. They must decide within 20 days of completion.
The seller or the buyer may request a withholding certificate.
The seller should alert the buyer in writing before the day of their transfer – letting them know that they are applying for a withholding certificate.

Categories of Applications for Withholding Certificates

Withholding certificate applications can be divided into several categories. These categories give specific information that is required to process the applications. The categories are as follows:

Applications based on a claim that the transfer is entitled to nonrecognition treatment or is exempt from tax,
Applications based solely on a calculation of the transferor’s maximum tax liability,
Applications under special installment sale rules,
Applications based on an agreement for the payment of tax with conforming security,
Applications for blanket withholding certificates, or
Applications on any other basis.

Application for FIRPTA Withholding Certificates

Applications for Withholding Certificates under Categories 1, 2 and 3

Sellers and corporations can apply for withholding certificates under categories (1), (2), and (3) using form 8288-B (Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests).

Form 8288-B requires the following details:

Name and contact information of the Transferor or Transferee.
Name of the Withholding Agent (usually the buyer)
Transfer date
Where the certificate should be sent once issued
How the property will be used
Whether any U.S income tax return related to that particular asset has been filed in the prior three years along with the amount paid during those same time frame;
Why exemption from taxes or non-recognition treatment should apply by choosing one out of three options provided

Applications for Withholding Certificates under Categories 4, 5 and 6

For categories (4), (5), and (6), applications are made as detailed below:

Suppose the application is based on information provided by another party to the transaction. In that case, that information must be supported by a written verification signed under penalties of perjury by that party and attached to the application.

All withholding certificate applications must follow the format below. The information must be provided in paragraphs labeled to correspond with the numbers and letters below. Where requested information does not apply, use “N/A” in the applicable space.

Information about why you’re applying.
1. Whether you’re applying under category four, five, or six.
2. If applying based on category four,
  1. Indicate whether the agreement covers (A)the seller’s maximum tax liability or B) the amount that would have otherwise been withheld.
  2. Indicate whether the agreement and security instrument conform to the standard formats.

Particulars about the buyer and the seller
1. Name, address, and tax identification number of the one applying for the withholding certificate.
2. Indicate whether the applicant is the seller or buyer.
3. Note the name, address, and TIN of all other sellers and buyers of the U.S. real property interest for which the withholding certificate is sought
Details about the property for which the withholding certificate is sought indicating the following:
1. Type of interest such as:
  1. Interest in personal property associated with real property.
  2. Interest in real property

Interest in a domestic U.S. real property holding corporation.

Contract price.
Date of the transfer.
The location and a description in the case of interest in real property
Class/type and amount if the interest is in a U.S. real property is a holding corporation.
The following information over the last three preceding tax years
1. Whether or not U.S. tax returns were filed related to the U.S. real property interest. If so, where were the returns filed? If not, why were the returns not filed?
2. Amount of U.S. income taxes paid related to the U.S. real property interest.

Avail complete information about why the withholding certificate should be issued.

Category (4) Applications (Agreement to Cover the FIRPTA Tax with a Security)

Should the application be based on an agreement for tax payment, it must comprise details establishing the transferor’s maximum tax liability or the amount withheld. It must also include a signed copy of the agreement proposed by the applicant and a copy of the security instrument proposed by the applicant.

The seller or the buyer may enter into an agreement for the tax payment. The agreement is a contract between the IRS and any other person and consists of two following essential elements:

A detailed description of the rights and obligations of each, and
A security instrument or other form of security acceptable to the Commissioner or his delegate.

There four main types of security acceptable to the Internal Revenue Service are:

Letter of credit
Bond with collateral
Bond with surety or guarantor
Guarantee (corporate transferors)

The IRS may accept any other security form it deems adequate at its discretion.

Category (5) (Request for Blanket FIRPTA Withholding Certificate)

The IRS may issue a blanket withholding certificate if the seller avails an irrevocable guarantee or letter of credit and enters into a tax payment and security agreement with the IRS.

Category (6) Applications

This category contains non-standard applications. You can apply for a withholding certificate under this category if you do not want to provide a non-conforming type of security. You must include the following information in your application:

The details required for Category (4) applications.
Details about the nonconforming security proposed by the applicant.
A memorandum of law and facts proving that the proposed security is enforceable and valid and sufficiently protects the government’s interest.

Signing the Application for a FIRPTA Withholding Certificate

Individual applicants sign the application. However, corporations and partnerships should be signed by a duly authorized agent, responsible officer, or general partner. Trusts and estates require the signature of trustees, executors, or fiduciaries before submitting for the application to be complete.

Mailing the FIRPTA Withholding Certificates Application

The application must be sent to the following address:

Ogden Service Center

P.O. Box 409101

Ogden, UT 84409

Amending a FIRPTA Withholding Certificate Application

Are you looking to make changes to your withholding certificate application? No problem – the IRS makes it easy. Simply send a statement with necessary details, such as the date and type of change requested, along with information about the document submission address used for your original filing. You are not required to follow a specific format, but you must include the following in your application:

Name, tax ID, and address of the individual making the changes.
Details on whether the person making the amendment is the transferor or the transferee
Date of the original application for the withholding certificate
Reason for requesting an amendment.
Details of changes in the facts submitted in the original application.
Description of the real property

How to Request a FIRPTA Withholding Certificate if You Live Overseas

If you are a foreign person who has sold or is planning to sell U.S. real estate, then a FIRPTA withholding certificate may be required to reduce or eliminate the tax withholding amount. To request your FIRPTA Withholding Certificate, complete IRS Form 8288-B and attach any supporting documents to prove your identity and foreign status. You may request to have the certificate mailed to the closing company or escrow.

Note: You must also provide a copy of this application to the buyer, closing agent, or other withholding agent, and they will be required to retain this form for their records.

If you have questions about the FIRPTA withholding certificate application process or require additional assistance, please get in touch with us at (201) 620-1482.

Applying for a FIRPTA Withholding Certificate Without a Tax ID

Suppose the seller or the buyer needs a valid tax ID when applying for FIRPTA Withholding Certificate. In that case, they can request one by filing an application for IRS Individual Taxpayer Identification Number (Form W-7) with Form 8288-B. Once the application is mailed, the IRS will take about ten days to process the request for a tax identification number.

Get Help with your FIRPTA Withholding Certificate Application

Making an application for a FIRPTA withholding certificate can be time-consuming and complicated. Taxpayers may need help understanding the rules and regulations associated with the application process and knowing which forms to fill out.

Fortunately, we at Arora Law P.C. can walk you through the process and provide accurate advice on how to apply for a FIRPTA certificate. We understand the complexities of the application, so we will save you time and ensure your documents are completed correctly.

We can provide guidance on the following:

How to determine if you need a FIRPTA withholding certificate
Which forms to fill out to apply for the certificate?
How to properly file and submit all documents related to your application
Navigating any challenges you may encounter during the application process

For more information about FIPTA withholding certificate applications, contact us today. We are here to answer your questions and get you on the right track to a successful application.

Title Tag: Understanding FIRPTA Withholding: A Guide for Non-U.S. Investors

Meta description: This guide provides a comprehensive overview of the Foreign Investment in Real Property Tax Act (FIRPTA) and explains what investors need to know about its withholding taxes.

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