Withholding of Tax on Dispositions of United States Real Property Interests
The disposition of a US 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 authorised the United States to tax foreign persons on dispositions of US real property interests.
A US real property interest includes sales of interests in parcels of real property as well as sales of shares in certain US corporations that are considered US real property holding corporations.
Persons purchasing US real property interests (transferee) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 10 percent of the amount realised (special rules for foreign corporations).
Withholding is intended to ensure US taxation of gains realised on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.
One of the most common exceptions to FIRPTA withholding is that the transferee (purchaser/buyer) is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his home and the purchase price is not more than $300,000.
For further information from the IRS website regarding tax withholding and filing exceptions visit http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding
NEW - March 2013 - important note to non-resident buyers - as stated below; the IRS considers the transferee/buyer to be responsible for ensuring that FIRPTA is handled in a transaction where the transferor/seller is a non-resident. In order to ensure a smooth transition on your eventual sale you must ensure that you retain proof that FIRPTA was satisfied on your original purchase.
If you purchase property from a non-resident seller and an exception to FIRPTA withholding does not apply then you must ensure that FIRPTA is satisfied as part of the closing. Check your settlement statement prior to closing where you should see 10% of the sales price withheld on the seller's side of the settlement statement. Request a copy of the withholding certificate from the closing agent and, if withholding was calculated, request a copy of forms 8288, 8288-A and front and back of cancelled check. Retain these documents in a safe place along with your settlement statement and other closing documents.
Foreign Investment in Real Property Tax Act (FIRPTA) Withholding
US Tax law requires that a non-resident alien who sells an interest in US real property is subject to withholding, for tax purposes, of 10% of the gross sales price (i.e. $30,000 on a property with a sales price of $300,000). The withheld amount is required to be forwarded to the IRS, by the Closing Agent, within 20 days of the date of closing. These funds are held until the IRS is satisfied that all taxes due by the non-resident are paid. In order to apply for a refund you can either:-
- File US tax returns for each year that rental income was received, reporting all income and expenses; file a final US tax return in the year following the year of sale, to report the sale and recover the balance of cleared funds. This process can take up to eighteen months depending on when, during the tax year, the property is sold.
- File prior year tax returns (where required) plus an application for early release of cleared withholding on or before the date of closing. By making this submission, the 10% withholding remains with the Closing Agent whilst the IRS processes the Withholding Application and issues a Withholding Certificate for the cleared funds - usually around 90 days.
Please note that applying for and receiving a Withholding Certificate does not eliminate your requirement to file a final US income tax return to report the sale transaction. In fact, when your final tax return is filed you may receive a further tax refund depending on the number of owners and length of time that the property was held.
In order to ensure a timely release of your funds it is extremely important that the following is obtained PRIOR to closing:-
- Buyer's names, address and SSNs - if US Citizens
- Buyer's names, address and ITINs - if non residents
- Or, if the buyers are non residents and do not have ITINs, the buyer's completed Form W-7 (one per buyer) and authenticated copy of the picture page of their passport(s)
Without this information the Application for a Withholding Certificate and early refund will be rejected. We suggest that you request your Realtor prepare your sales contract contingent upon the buyers providing the above information.
If you wish us to prepare your IRS submission for an early release of your cleared withholding please contact our office for assistance.