By Sean Easley, National Account Manager at First American Title.
Understanding the Foreign Withholding Rules
Under the Foreign Investment in Real Property Tax Act (FIRPTA), the buyer of U.S. real estate from a foreign person or entity must withhold tax equal to 15% of the “amount realized” from the sale.
Basic Rules under FIRPTA
Withholding is only necessary when the seller is a foreign person, which includes non-resident alien individuals, partnerships, trusts and estates and certain corporations domiciled outside of the United States. At or before the closing, if the seller signs a certification of non-foreign status stating under penalty of perjury that he is not a foreign person, the buyer can rely on that unless he has actual knowledge that it is not accurate. If the seller is able to sign the certification, no withholding is required.
If the seller is a foreign entity or person, the buyer must withhold the 15% and remit same to the IRS within 20 days of the closing. If the buyer fails to do so, the buyer is liable to the IRS for the tax that should have been withheld, plus penalties and interest.
FIRPTA withholding is commonly referred to as a 15% tax; however, this is not technically correct. If the amount of tax ultimately due on the filing of the foreign seller’s U.S. tax return is less than the amount withheld, the overpayment is refunded. On the other hand, if the ultimate tax liability is greater than the 15% withheld, the difference will be due from the foreign seller.
Withholding Certificates
If the ultimate tax liability is expected to be either zero or less than the required 15% withholding amount, the foreign seller can apply for a withholding certificate requesting a reduction in the withholding amount. This is done by filing IRS Form 8288-B. This form essentially constitutes a mini-tax return and must be filed prior to closing. The IRS takes approximately 90 days to process this form. In the meantime, the buyer must withhold but can wait for the IRS’s response before remitting the funds. Once the buyer hears back from the IRS, he must send whatever withholding is required to the IRS within 20 days.
1031 Exchanges
There is a common misconception that foreign sellers can avoid FIRPTA withholding by participating in a 1031 exchange. In order for the sale of the relinquished property in a 1031 exchange to be exempt: 1) the closings of the relinquished and replacement properties must occur simultaneously; 2) there can be no boot; 3) the seller must notify the buyer that the seller is not required to recognize any gain or loss; and 4) the buyer must provide, within 20 days, the non-recognition notice to the IRS.
Conclusion
This is a brief article summarizing some, but not all, of the FIRPTA rules. In addition, if the transaction will be structured as part of a 1031 exchange, the professionals at First American Exchange Company can help make it a seamless transaction. Contact Janna Perret to set up an exchange at 504-539-5919 or jperret@firstam.com.
Sean Easley, National Account Manager
seasley@firstam.com
713.569.7567
