FIRPTA (Foreign Investment in Real Property Tax Act)
THIS IS AN INFORMATIONAL TOPIC AND NOT TAX ADVICE. AGENTS ARE ADVISED TO HAVE THEIR CUSTOMERS AND CLIENTS CONTACT THEIR TAX PROFESSIONALS FOR TAX ADVICE.
Overview
The Foreign Investment in Real Property Tax Act (FIRPTA) generally imposes a withholding requirement on a transferee (buyer) who acquires U.S. real property from a foreign person. The buyer must deduct and withhold a percentage (usually 15%) of the amount realized (generally the sales price). 26 U.S.C. §1445.
The withholding is an estimate of the taxes the foreign transferor (seller) will owe on the transfer. When filing an income tax return for the year of sale, the seller will calculate the actual gain and related tax liability and may receive a refund from the Internal Revenue Service (IRS) if the actual tax liability is less than the amount withheld.
Buyer Responsible for Withholding
FIRPTA puts the burden of compliance on the buyer. The buyer must determine if the seller is a foreign person. If the seller is a foreign person and no exemption applies, the buyer is responsible for withholding and timely remitting the withheld funds to the IRS.
There is no provision in the IRS Code for the buyer to assign that responsibility to someone else, such as the settlement agent. Nonetheless, many settlement agents withhold the proper percentage at closing and remit it to the IRS with the appropriate forms. Alternatively, some settlement agents do not perform this service; they then typically have the parties acknowledge in writing that they are not handling the FIRPTA withholding and remittance as part of the closing.
Determining if Withholding is Necessary
Withholding is necessary if:
1. The seller is a “foreign person,” as that term is defined in federal law; and
2. No exception applies.
Determining if Seller is a Foreign Person
Withholding is not required if the seller furnishes to the buyer a non-foreign affidavit Certificate of Non-Foreign Status-Individual or Certificate of Non-Foreign Status-Entity stating, under penalty of perjury, the seller’s United States tax payer identification number and that the seller is not a foreign person. However, an affidavit known to be false may not be relied upon.
Sellers typically know their U.S. tax status or can determine it by consulting with a tax advisor. However, it is helpful for title agents to have a basic understanding as to who constitutes a foreign person so that they can plan ahead for any withholding that may be necessary.
Foreign Person Defined
A foreign person includes:
· Nonresident alien individual (See Alien Defined below)
· Foreign corporation that has not made an election to be treated as a domestic corporation
· Foreign partnership
· Foreign trust
· Foreign limited liability company
· Single-member domestic limited liability company if the sole member is a foreign person or entity
FIRPTA does not apply if the seller is considered a United States person, which includes:
· U.S. citizen
· Resident alien (See Determining U.S. Residency below)
· Domestic corporation
· Domestic partnership
· Trust subject to primary supervision by a U.S. court and controlled by a U.S. person
· Domestic limited liability company, unless it has just one member and that single member is a foreign person or entity
Merely having a social security number does not, by itself, mean that a person is a United States citizen or resident.
Alien Defined
An alien is an individual who is not a U.S. citizen. Aliens are classified as nonresident aliens and resident aliens. IRS Publication 519. The United States includes Puerto Rico, the U. S. Virgin Islands, Guam, the Northern Mariana Islands and American Samoa, in addition to the fifty states.
Determining U.S. Residency
An alien is considered a U.S. resident, not subject to withholding, if the alien:
· Has lawful permanent resident status (green card holder), or
· Meets the Substantial Presence Test
Substantial Presence Test
To meet this test, the person must be physically present in the U.S. on at least:
· 31 days during the current year, and 183 days during the 3-year period that includes the current year, and
· 2 years immediately before that, counting:
· All the days present during the current year, and
· 1/3 of the days present during the first preceding year, and
· 1/6 of the days present during the second preceding year.
These days cannot include any day that a foreign person is present in the United States as a representative of a foreign government, teacher or student under an F, J, M or Q visa, or as a professional athlete in a charitable sports event.
Exceptions to FIRPTA
If the seller is a foreign person, the next step is to determine if an exception or exemption to FIRPTA applies.
Personal Use Exemption
FIRPTA withholding is not required if the buyer is acquiring the property for use as a residence and the sales price is $300,000 or less. If the buyer is acquiring the property for use as a residence and the sales price is over $300,000 but not more than $1,000,000, withholding is required at the reduced rate of 10%. A certificate of exemption from the buyer is used to establish the personal use exemption. The personal use exemption does not apply if the sales price exceeds $1,000,000.
The buyer or a member of the buyer’s family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, the days the property will be vacant are not counted. For this exception, the transferee must be an individual.
| Sales Price | Withhold |
| $300,000 or less | $0 |
| Over $300,000 but equal to or less than $1,000,000 | 10% of the sales price |
Authority: IRC § 1445(c)(4); 26 C.F.R. § 1.1445-1(b)(2).
Withholding Certificates
The amount that must be withheld from the sale can be adjusted pursuant to a withholding certificate issued by the IRS. The buyer, the buyer’s agent, or the seller may request a withholding certificate. The IRS generally acts on these requests within 90 days after receipt of a complete application, including the Taxpayer Identification Numbers (TINs) of all of the parties to the transaction. A withholding certificate is generally issued after the IRS has determined that reduced withholding is appropriate because, for example, the amount that must be withheld would be more than the seller’s maximum tax liability.
A seller that applies for a withholding certificate must notify the buyer in writing that the certificate has been applied for on the day of or the day prior to the sale. A withholding certificate cannot be applied for after the closing.
If the seller provides the closing agent with a copy of an Application for Withholding Certificate which has been filed with the IRS on Form 8288-B, the closing agent escrows the withheld funds until the IRS has ruled on the application by issuing a Withholding Certificate. The escrow agent then pays over the amount required by the IRS. The amount withheld (or lesser amount as determined by the IRS) must be reported and paid over to the IRS within 20 days following the day on which a copy of the Withholding Certificate or notice of denial is mailed by the IRS.
Frequently, the seller’s accountant files the Application for Withholding Certificate. The settlement agent should require proof that the application was filed timely, that is, on or before the date of the closing. Also, the settlement agent should require written assurance that the accountant will promptly notify the settlement agent of the IRS’s ruling on the application. It is a good practice to follow up with the accountant regularly on the status of the application. Many title agents have been penalized by the IRS because they were not promptly informed that an application had been denied and, therefore, did not remit funds to the IRS within 20 days after the denial.
Qualifying Statement Obtained
A qualifying statement is a statement by the IRS that the transaction is exempt from taxation or that the seller transferor has reached an agreement for the payment of any tax imposed on the transfer or that the transaction is exempt.
Withholding Based on Total Amount Realized
At the closing the title agent must withhold a percentage of the total amount realized by the foreign person on the disposition of the real estate. In a typical bona fide sale for value, the “amount realized” is the gross sales price, not the net sales proceeds. In other transactions, the amount realized is the sum of: (a) the cash paid or to be paid; (b) the fair market value of other property transferred, or to be transferred; and (c) the amount of any liability assumed by the buyer or to which the property is subject immediately before and after the transfer.
Joint Sellers – FIRPTA Withholding
If one or more foreign persons and one or more U.S. persons jointly transfer real property, withholding is allocated and calculated based on their capital contribution to the property. The IRS treats a husband and wife as having contributed 50% each. For example, if the wife is a foreign person and the husband is a U.S. person, 15% of the wife’s gross proceeds should be deducted and paid to the IRS at closing.
If there are multiple foreign persons, the amount withheld can be credited among the foreign persons as they mutually agree. They must request that the withholding be credited as agreed upon by the 10th day after the date of transfer. If no agreement is reached, the withholding should be credited by evenly dividing it among the foreign sellers. IRS Instructions for Form 8288 (Rev. May 2018).
Percentage Amount to Withhold
FIRPTA withholding is 15% of the gross sales price, not 15% of the seller’s net proceeds. However, where the personal use exemption applies (i.e., buyer purchasing for use as a residence), the amount of withholding is as follows:
| Sales Price | Withhold |
| $300,000 or less | $0 |
| Over $300,000 but equal to or less than $1,000,000 | 10% of the sales price |
| Over $1,000,000 | 15% of the sales price |
Authority: IRC § 1445(c)(4); 26 C.F.R. § 1.1445-1(b)(2).
Further, a Withholding Certificate issued by the IRS prior to the closing could determine that the transaction is exempt from withholding or reduce the amount required to be withheld. Please see Withholding Certificates above.
Sales Proceeds Less than Withholding Amount
Withholding is based on the sales price, not the seller’s net sales proceeds. If the seller’s net sales proceeds are less than the amount required to be withheld, the seller must typically bring cash to the closing to make up the difference.
Remitting Withheld Funds
The amount withheld from the gross sales price must be transmitted to the IRS using IRS Form 8288. Additionally, Copies A and B of Form 8288-A must be attached to Form 8288. These forms in fillable format, as well as detailed instructions for completing them, are available at www.irs.gov.
The IRS will stamp Copy B of Form 8288-A and will forward the stamped copy to the foreign seller. To receive credit for the withheld amount, the seller generally must attach the stamped Copy B of Form 8288-A to a U.S. income tax return.
If the seller does not have a taxpayer identification number (TIN), Forms 8288 and 8288-A must still be filed. However, the IRS will not send the seller a stamped Copy B of Form 8288-A. The IRS will send a letter to the seller requesting the TIN and providing instructions for how to get a TIN. When the seller provides the IRS with a TIN, the IRS will provide the seller with a stamped Copy B of Form 8288-A.
Taxpayer Identification Numbers
IRS Form 8288 has a box for the buyer’s TIN. Form 8288-A has a box for the seller’s the taxpayer’s TIN. If a party does not have a TIN, the space may be left blank and the settlement agent should report and remit the FIRPTA funds as usual. The IRS will accept the funds, but will not process the reporting until the foreign seller applies for, and obtains a TIN. This will not affect the title agent, but may cause a delay in the foreign seller receiving a tax refund, if any, from the IRS. A party who does not have a TIN at the time of closing may wish to consult a tax professional regarding the appropriateness of filing a W-7 application for a TIN, along with a copy of the 8288 and 8288-A, after closing.
When to File
Generally, the amount withheld must be remitted by the 20th day after the closing. However, if the seller provides the closing agent with a copy of an Application for Withholding Certificate which has been filed with the IRS on Form 8288-B, then the closing agent or other withholding agent selected by the buyer escrows the amount withheld. The withholding agent holds the withheld funds until the IRS has ruled on the application by issuing a Withholding Certificate, and then pays over the amount as determined by the IRS. It may take up to 90 days for the IRS to rule on an Application for a Withholding Certificate. The amount withheld (or lesser amount as determined by the IRS) must be reported and paid over to the IRS within 20 days following the day on which a copy of the Withholding Certificate or notice of denial is mailed by the IRS.
Frequently, the seller’s accountant files the Application for Withholding Certificate. The settlement agent should require proof that the application was filed timely, that is, on or before the date of the closing. Also, the settlement agent should require written assurance that the accountant will promptly notify the settlement agent of the IRS’s ruling on the application. It is a good practice to follow up with the accountant regularly on the status of the application. Many title agents have been penalized by the IRS because they were not promptly informed that an application had been denied and, therefore, did not remit funds to the IRS within 20 days after the denial.
Where to File
IRS Instructions for Form 8288, as revised May 2018, provides the following mailing address for the IRS FIRPTA service center.
Ogden Service Center
P.O. Box 409101
Ogden, UT 84409
Foreign Person Transfers Property to United States Person Prior to Closing
A foreign seller cannot circumvent FIRPTA by deeding the real property to a United States Person prior to the closing to be insured. Title agents are cautioned against preparing such deeds for the purpose of assisting in the attempted circumvention of FIRPTA withholding.
Retain Copies for 5 Years
The closing agent must retain copies of all FIRPTA forms for at least five years past the closing date.
Deceased Foreign Seller
When the personal representative or heirs of a deceased foreign person are selling real property, a Transfer Certificate from the IRS must be obtained prior to the closing. The deceased foreign owner’s estate is only entitled to a $60,000 exemption for federal estate tax purposes. It is recommended that the heirs or estate representative consult with their tax professional to apply for and obtain a Transfer Certificate.