The disposition of a U.S. real property interest 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).
In most cases, the buyer (transferee) is the withholding agent. The transferee must find out if the transferor is a foreign person. If the transferor is a foreign person and the transferee fails to withhold, the transferee may be held liable for the tax. For cases in which a U.S. business entity, such as a corporation or partnership, disposes of a U.S. real property interest, the business entity itself is the withholding agent.
A U.S. real property interest is an interest, other than as a creditor, in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of real property (such as farming machinery). It also means any interest, other than as a creditor, in any domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or the 5-year period ending on the date of disposition (applicable periods).
An interest in a corporation is not a U.S. real property interest if:
The transferee must deduct and withhold a tax on the total amount realized by the foreign person on the disposition. The rate of withholding generally is 15% (10% for dispositions before February 17, 2016).
The amount realized is the sum of:
If the property transferred is owned by a foreign person and at least one other person, the amount realized is allocated between the transferors based on the capital contribution of each transferor.
A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 21% of the gain it recognizes on the distribution to its shareholders who are foreign persons.
A domestic corporation must withhold tax on the fair market value of the property distributed to a foreign shareholder if:
For distributions before February 17, 2016, the corporation generally must withhold 10% of the amount realized by a foreign person. For distributions after February 16, 2016, the rate increases to 15%.
For additional information on the withholding rules that apply to corporations, trusts, estates, and REITs, refer to section 1445 of the Internal Revenue Code and the related regulations. For additional information on the withholding rules that apply to partnerships, refer to discussion under partnership withholding. Also, consult the "U.S. Real Property Interest" section in IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
FIRPTA documents are processed at:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
Answer 1: No, the amount realized cannot be allocated entirely to one transferor when two or more transferors own the USRPI.
If one or more foreign persons and one or more U.S. persons jointly dispose a USRPI, the amount subject to withholding under IRC 1445 is determined in the following manner:
Answer 2: Yes, withholding under IRC 1445 is applicable in situations where a USRPI held in the corpus of a grantor trust is disposed of when a Foreign person is considered a grantor with respect to all or a part of the USRPI. Based on the grantor trust rules (IRC 671 through IRC 678), an individual is the grantor of the asset(s) he or she contributes to the corpus of a trust that he or she is determined to still have control over under the grantor trust rules.
For example, if a USRPI is purchased equally by a husband, who is a U.S. person, and wife, who is a Foreign person, in their names and then contributed to the corpus of a trust. After the contribution, the husband and wife are determined to still have control over the USRPI under the grantor trust rules. Then the husband and wife are considered grantors, each owning 50% of the USRPI. So, for the purposes of IRC 1445, when the USRPI is disposed of, withholding would be applicable to the foreign spouse’s 50% of the sales proceeds.
Additionally, if a USPRI is purchased in the trust’s name from monies contributed to the trust in equal amounts by both the husband and wife (one U.S. person and one foreign person) and both spouses are considered to be grantors of the monies contributed to the trust used to purchase the USRPI, then both spouses are grantors of the USPRI once it is purchased. In the case, for purposes of IRC 1445, when the USRPI is disposed of, withholding would be applicable to the foreign person’s 50% of the sales proceeds.
Answer 3: When a transferor/seller disposes of a USRPI, it should be reported, for income tax purposes, in the year the disposition occurred. The date of disposition on the Copy B of Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests PDF , may be different than the actual date of disposition in the situation where a withholding certificate request is made. In these situations, the Internal Revenue Service (IRS) is required to change the date of disposition on the form to the date of the withholding certificate request approval or denial letter sent to the requester.
For example, a transferor/seller sends the IRS a request for a withholding certificate on December 10, 2018 for a disposition of a USRPI that is to take place on December 15, 2018. The IRS reviews the request and issues the withholding certificate denial letter on March 10, 2019. Although the actual date of the disposition is December 15, 2018, the date of disposition on Copy B of Form 8288-A would be March 10, 2019, the date of the denial letter. However, the transferor/seller is required to report the disposition on her or his 2018 income tax return as the actual date of the disposition is December 15, 2018.
Answer 4: Withholding under IRC 1445 is applicable when a foreign person assigns their right to purchase a USRPI to another party.
For example: withholding under IRC 1445 is applicable if a foreign person (FP) signs a contract to buy a house in State A from a builder for $400,000 with a closing date of January 31, 2020. Before January 31, 2020, FP decides to sell the right to purchase the house for $30,000 to another individual (WH). WH is required to withhold $4,500, 15% of the of $30,000 amount realized by FP, and remit it to the Internal Revenue Service with Forms 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.
Answer 5: The exclusion of gain for the sale of a personal residence under IRC 121 may apply to NRAs when they sell their U.S. personal residence. Because NRAs cannot file joint returns unless they are married to U.S. persons, NRAs would need to take their own share of the principal residence exclusion amount on separate tax returns. Consequently, the maximum amount of excludable gain for NRAs that file Form 1040NR, U.S. Nonresident Alien, is $250,000. For the exclusion to apply, NRAs would have to meet the eligibility test required for the exclusion. To determine if a nonresident alien meets the Eligibility Test, you can review the five steps of the Eligibility Test in Publication 523, Selling Your Home, as well as review Topic No. 701, Sale of Your Home.
If an NRA qualifies to claim the IRC 121 exclusion, the statutory withholding under IRC 1445 on the amount realized from the sale could exceed the maximum tax liability on the sale. Therefore, an NRA may request a withholding certificate from the Internal Revenue Service to provide to the buyer. The withholding certificate would allow the buyer (through escrow/closing agent) to withhold tax at an approved reduced rate.
Answer 6: In order for a USRPI to be considered a “residence” of the transferee/buyer for the reduced or eliminated withholding, one or more transferees/buyers have to have definite plans to reside at the USRPI for at least 50 percent of the number of days that the property is used by any person during each of the first two 12-month periods following the date of transfer. The number of days that the property will be vacant is not taken into account in determining the number of days such property is used by any person. A transferee/buyer shall be considered to reside at a property on any day on which a member of the transferee/buyer's family, including brothers and sisters (whether whole or half-blood), spouse, ancestors and lineal descendants, resides at the property.
For example, a transferee/buyer (BUYER) purchases, in her name only, a USRPI for $299,000 and states she is going to reside in the USRPI. BUYER is not married but has an adult daughter. The property is purchased on January 1, 2017. BUYER and her daughter live in the USRPI together through the end of April 2017. On May 1, 2017, BUYER takes a temporary position overseas where she lives for 8 months while her adult daughter lives in the USRPI. BUYER returns on January 1, 2018 and lives in the USRPI with her daughter until May 31, 2018 when BUYER takes another temporary overseas job until February 22, 2019.
Although BUYER only resided at the USRPI for approximately 33% of the days during 2017 and 42% of the days during 2018, her daughter resided there 100% of the days during 2017 and 2018. Therefore, the USRPI is considered a “residence” of BUYER for 2017 and 2018.
Answer 7: If a transferee/buyer of a USRPI fails to withhold from the amount realized in reliance upon the exception that the transferee/buyer planned on using the USRPI as a personal residence for the next two years, but did not in fact reside at the USRPI for the minimum required time, the transferee/buyer shall be liable for the failure to withhold (if the transferor/seller was a foreign person and did not pay the full U.S. tax due on any gain recognized upon the transfer). However, if the transferee/buyer establishes that the failure to reside the minimum number of days was caused by a change in circumstances that could not reasonably have been anticipated at the time of the transfer, then the transferee/buyer shall not be liable for the failure to withhold.
Answer 8: The IRS may change the tax year designated on Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, if the tax year originally entered was incorrect. This could be because the date was the wrong transfer date or there was a withholding certificate request filed and the date of the withholding certificate issued was subsequent to the date of transfer.
For example, if a request for a withholding certificate is filed on November 15, 2016, the actual date of transfer is December 1, 2016 and the IRS issues the withholding certificate on February 2, 2017, the date of transfer for Forms 8288 and 8288-A purposes is February 2, 2017. The tax year on the Form 8288 and Form 8288-A is changed by the IRS to February 2017, the date the withholding certificate is issued. See IRM 3.22.261.21.2. However, the transferor/seller reports the transfer on the income tax return for the year the actual transfer occurred, which is 2016.
Answer 9: The transferor/seller can ensure that there will be no withholding under IRC 1445 in situations where the amount realized on the disposition of a USRPI is $300,000 or less and the transferee/buyer is planning on using the USRPI as a personal residence by ensuring the all parties are well informed. This includes making sure the transferee/buyer and the closing agent are aware of the exception to withholding and making sure the transferee/buyer informs the closing agent that they plan on living in the USRPI as a personal residence. The instructions for the Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, provide information on this exception from withholding.
Answer 10: A transferee/buyer or the transferor/seller (or authorized person), may complete the Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, and file it to request a withholding certificate for reduced or no withholding under IRC 1445. A transferee/buyer may file the Form 8288-B in situations where
Answer 11: A foreign transferor/seller who is residing overseas at the time they request a withholding certificate may put the escrow or closing company’s information in Box 5 of the Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, to ensure that the closing agent timely receives IRS correspondence with respect to a determination made on a request of a withholding certificate.
Answer 12: No, a foreign person, who does not have a valid reason to obtain an ITIN, cannot request an ITIN prior to entering a contract to dispose of a USRPI. A foreign person, who does not have and is not eligible to receive a social security number, can only apply for and receive an ITIN using Form W-7, Application for IRS Individual Taxpayer Identification Number, in certain situations including but not limited to a requirement to
Therefore, absent any other valid reason to obtain an ITIN, the IRS will deny an application for an ITIN submitted prior to entering into a contract to dispose of a USRPI. As soon as there is a legally binding contract for the sale of a USRPI, the foreign person/seller is eligible to request an ITIN by filing Form W-7 under Exception #4, Third-Party Withholding – Disposition by a Foreign Person of a U.S. Real Property Interest.
Answer 13: The IRS will normally act on a withholding certificate application within 90 days of receipt of all information necessary to make a proper determination.
If a transferee/buyer or transferor/seller does not have a TIN and an ITIN is requested at the same time as the withholding certificate request, the ITIN request is processed within 10 days of receipt. The completed Form W-7 needs to include the completed form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, with the entire package forwarded to the IRS at the address given in the Form W-7 instructions.
Answer 14: Whether FIRPTA withholding is required on the disposition of U.S. real property that is located in a community property state and titled only in the name of a U.S. person who is married to an NRA is dependent upon the facts and circumstances. Generally, FIRPTA withholding is required when an NRA disposes of a U.S. real property interest (USRPI). Under community property law, title to property generally carries relatively little weight in determining whether property is separate or community property. Since the community property system has been adopted in several U.S. states and these community property laws are not all the same in all of the states, determining whether real estate is separate property or community property in one of these community property states needs to be determined based upon the facts and circumstances and the specific state's community property laws. See Publication 555, Community Property, for additional information.
Answer 15: Generally FIRPTA withholding does not apply when an NRA exchanges a USRPI for stock in a U.S. corporation if 1) the disposition of the USRPI falls under one of the nonrecognition provisions of the IRC where gain or loss is not required to be recognized on the disposition such as under IRC 351, 2) the USRPI contributed to the U.S. corporation is exchanged for another USRPI which would be subject to U.S. taxation upon its disposition by the NRA, 3) the NRA provides the withholding agent the required notice under penalties of perjury that the disposition is not subject to gain or loss under a nonrecognition provision in the IRC, and 4) the withholding agent forwards a copy of the NRA’s notice along with the required cover letter to the IRS by the 20th day after the date of the disposition.
Answer 16: Generally, unless provided otherwise in the regulations, FIRPTA withholding is required in the situation where a NRA disposes of a USRPI by exchanging it for shares of stock in a foreign corporation where the foreign corporation treats the contribution by the NRA as either paid in capital or a contribution to capital and the foreign corporation has not made the election under Internal Revenue Code (IRC) 897(i) to be treated as a U.S. corporation for purposes of FIRPTA withholding. In this situation, the shares of stock of the foreign corporation received by the NRA are not considered a USRPI and are not subject to U.S. taxation upon the NRA disposing of the stock in the future. Therefore, FIRPTA withholding would be required on the amount realized on the disposition of the USRPI to the foreign corporation in exchange for shares of the foreign corporation.
Answer 17: Yes, FIRPTA withholding would be required. A NRA would not be exempt from FIRPTA withholding in the situation where the transferee intended to use the USRPI as a residence and the amount realized on a disposition of a USRPI is greater than $300,000 but each of the transferors' allocable portions of the amount realized is $300,000 or less. The Internal Revenue Code (Code) provides the exemption to FIRPTA withholding titled "Residence where Amount Realized does not exceed $300,000". This exemption from FIRPTA withholding is applicable if the transferee is acquiring the USRPI as a residence and the amount realized is $300,000 or less. The term "amount realized" is defined in the Code as the sum of the total cash paid by the transferee, the total fair market value of property transferred by the transferee, and the total amount of debt or liability assumed by the transferee and not each transferors' allocable portion of the amount realized. Therefore, if the amount realized on the disposition is greater than $300,000, this specific exemption is not applicable.
Answer 18: No, generally FIRPTA withholding is not applicable when an NRA disposes of stock in a foreign corporation that has U.S. real property as its only asset as the stock in the foreign corporation is not considered to be a USRPI. FIRPTA withholding is not applicable unless an NRA disposes of a USRPI. However, if the foreign corporation makes the election under Internal Revenue Code (IRC) 897(i) election to be treated as a U.S. corporation and that corporation is determined to be a U.S. real property holding corporation (USRPHC), then the stock would be considered a USRPI and FIRPTA withholding would be applicable on the disposition of the stock.
Answer 19: The general language to put on Line 3 of the Form 2848 in a FIRPTA related matter includes inserting "Withholding Tax - IRC 1445" in the "Description" area, inserting "Forms 8288, 8288-A, 8288-B" in the "Tax Form number" area, and inserting the year (YYYY) the USRPI was disposed of in the "Tax Year/Periods" area.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.