FIRPTA: US real property interest
Please note: This post was reviewed and is still accurate as at February 2020.
The disposition of a US real property interest is subject to income tax and withholding provisions of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). US real property interest is an interest, other than as a creditor, in real property located in the United States or the US Virgin Islands (or any interest, other than as a creditor, in a US real property holding corporation) by a foreign person (the transferor). A disposition means a sale or exchange, liquidation, redemption, gift, or transfer of a US real property interests.
In most cases, the transferee/buyer is the withholding agent. A transferee/buyer must find out if the transferor is a foreign person. If the transferor is a foreign person and a transferee fails to withhold, a transferee may be held liable for the tax.
The transferee must deduct and withhold a tax on the total amount realized by the foreign person on the disposition and transmit it to the IRS by the 20th day after the date of transfer. The rate of withholding generally is 15% for Federal Tax purposes (states may have their own version and are not covered here).
The amount realized on disposition is the sum of:
- The cash paid, or to be paid (principal only);
- The fair market value of other property transferred, or to be transferred; and
- The amount of any liability assumed by the transferee.
It is possible to lower or entirely negate the withholding requirement under FIRPTA. This is accomplished by requesting a withholding certificate from the IRS.
Applications for FIRTPA withholding certificates are divided into six basic categories:
- Applications based on a claim that the transfer is entitled to nonrecognition treatment or is exempt from tax,
- Applications based solely on a calculation of the transferor’s maximum tax liability,
- Applications under special installment sale rules,
- Applications based on an agreement for the payment of tax with conforming security,
- Applications for blanket withholding certificates, and
- Applications on any other basis.
Either a transferee or a transferor may request a withholding certificate. The IRS will generally act on these requests within 90 days after receipt of a completed request. A transferor that applies for a FIRPTA withholding certificate must notify the transferee in writing that the certificate has been applied for on the day of or the day prior to the transfer. In such cases, a transferee does not have to transmit the withholding tax amount until the 20th day after the day the IRS mails a copy of the withholding certificate or notice of denial.
In addition to the above, there are a number of exceptions to the requirement to withhold tax on a disposition. For example, the acquisition by an individual of a U.S. real property interest for use as a residence (meaning that a buyer intends to reside in the property for at least 50% of time during the first two years after the date of transfer) and the sales price is $300,000 or less; or the sale of an interest in a domestic corporation if the corporation provides a certification stating, under penalties of perjury, that the interest is not a U.S. real property interest; or if the amount the transferor realizes on the transfer of a US real property interest is zero.
Please contact us before making any decisions when dealing with the sale or purchase of a US real property where the FIRTPA rules may apply to determine what is best for your situation.