Foreign Sellers of Real Property in the U.S. Pay 10% Tax

Is a foreign person taxed differently than a citizen, when selling property in the United States of America?  The answer is yes, but there are quite a few exemptions to consider as well.

The Foreign Investment in Real Property Tax Act, otherwise known as FIRPTA, became law in 1980 and requires closing agents (attorney’s, title companies, etc.) to withhold 10% of the amount realized.  There are a few things that the “amount realized” could be calculated from, but generally it is the purchase price of the property.  The 10% withheld is owed to the IRS.

The Code imposes on the transferee the liability for collection and payment to the IRS of ten (10%) percent of the purchase price when a foreign person sells U.S. real estate. The Code defines a “foreign person” as “any person other than a United States person.” What that means is not entirely clear; however, the determining factor appears to be whether or not the transferor has a taxpayer identification or social security number.

Who and What Interests are affected?

FIRPTA - FOREIGN SELLERThe Act affects the disposition of U.S. real property interests by foreign persons.  As defined by Section 897 (c)(1)(A) of the IRS Code, (See 26 U.S.C.A. 897), “U.S. real property interests” include any interest in real property, including interests in mines, wells or other natural deposits.  Also included is certain personal property, such as farm machinery associated with the use of the property, and all buildings and vacant land. In some cases, the stock of a corporation can be considered a U.S. property interest, as in the case of a U.S. real property holding corporation. The rules relating to options to acquire U.S. real property are more complex. The sale or exercise of an option is considered a sale of a U.S. property interest; however, the granting or lapse of an option is not considered a sale. The definition of a U.S. property interest does not include an interest in a domestic real investment trust.

“Foreign persons,” as defined by the Act, include the following:

  • Non-resident aliens
  • Foreign partnerships
  • Foreign trusts or estates
  • Foreign corporations that have not elected to be treated as domestic corporations

Individual resident aliens are not subject to FIRPTA because they are subject to the same income tax laws as American citizens. A resident alien usually has a social security number. Having this tax ID number or, in the case of an entity, having a federal taxpayer ID number, usually means that the individual or entity is ‘filing income tax returns in this country in the same manner as other United States residents which exempts the individual from FIRPTA rules.

Why is the Selling Price so important?

The selling price is important because there is no exemption in the Act for residences selling in excess of $300,000.

Do any exemptions apply?

Certain exemptions are available under FIRPTA and relieve the buyer of any responsibility to withhold.  The most common exemptions are as follows:

  • The property is acquired by the buyer for his use as his personal residence and the amount realized (generally the sales price) on the sale is $300,000 or less.  These facts should be documented by an affidavit from the buyer.  The status of the seller and his use of the property are immaterial.  Many Canadians, Mexicans, and citizens of other countries have vacation or second homes in the United States. While those homes may not be the owners’ primary residence, they are still used for residential purposes and qualify for this exemption, provided the sales price is $300,000 or less.  For this exemption, “residential purposes” can be defined loosely as long as the property is used as a residence.
  • The seller furnishes the buyer with a Non-Foreign Person Certification (Individual Transferor).   This certification includes his social security or U.S. tax ID number, home or office address, and an affirmative statement that he is not a foreign person as defined by the Act.  If a foreign corporation, that has elected to be treated as a domestic corporation under other sections of the Code (Section 897), presents a Non-Foreign Person Certification (Entity Transferor), an acknowledgement of election by the IRS must also be attached.
  • The buyer is provided with a withholding certificate issued by the IRS stating the amount to be withheld or that no withholding is required. This exemption requires the seller to file for and receive a full or partial waiver of the withholding requirement.  The waiver is accomplished by completing Form 8288-B in advance of the sale and having the seller present the form with the IRS’s approval to the agent at or before closing.  Rarely will you encounter a “pre-approved” IRS form.  Instead, some variation of this process occurs.
  • The sale is the disposition of stock regularly traded in an established market.
  • In the case of corporate stock sales, the seller furnishes a certificate avowing that it has never been a U.S. real property holding corporation.

How much to withhold?

The withholding rate is ten (10%) percent and is based on the purchase price.  It is not affected by the amount of cash the seller is to receive.  Withholding is tied into the amount realized (cash, other property received, and liability on the property assumed by the buyer).  If the seller’s mortgage liability is satisfied out of the sales proceeds, the mortgage is treated as part of the proceeds.  The amount received, normally the sales price reduced by sales expenses such as the realtor’s commission, title charges, inspection fees, etc., is not the same as the amount realized.

Under the Act, withholding tax is the responsibility of the transferee (buyer) and any penalties for non-compliance with the regulations are also the responsibility of the buyer.   Again, because of its unique role in a sale and purchase transaction, as a matter of custom and business practice, it has become the responsibility of the title company or escrow agent to handle the withholding and subsequent payment to the IRS.

The funds withheld from the seller’s proceeds are forwarded to the IRS by means of IRS Form 8288, along with attachment 8288-A.  These forms are available for download below, or you can search for all of these forms easily at www.irs.gov

If you are a foreign seller considering the sale of your U.S. Real Property, feel free to give Richard Blake a call at 727-359-0388 to discuss your situation in greater detail.  We highly suggest you speak with an accountant and/or tax attorney who specialize in this area and we can assist you in finding the right expert for your needs.

The majority of this content was provided by Old Republic National Title Insurance Company.

  Form 8288 (137.2 KiB, 152 hits)

About Richard Blake

After being ranked in the top 1% of Real Estate professionals in the Tampa Bay area for nearly a decade, Richard Blake now spends much of his time training other top Real Estate experts who want to grow their businesses by offering innovative and world class client services.

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