FIRPTA withholding: 15% when a foreigner sells US property

Who has to withhold, and on what?

FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980. The IRS says it lets the United States tax foreign persons who dispose of U.S. real property interests, and that a “disposition” includes a sale, exchange, gift and other transfers. In most cases the buyer, called the transferee, is the withholding agent.

The base is the amount realized, not the profit. The IRS defines it as the cash paid or to be paid (principal only), the fair market value of other property transferred, and any liability the buyer assumes or that the property is subject to. A $500,000 sale with a $300,000 mortgage is withheld on $500,000.

The buyer must find out whether the seller is a foreign person. The IRS warns that if the seller is foreign and the buyer fails to withhold, the buyer may be liable for the tax, plus penalties and interest.

Which rate applies?

The IRS notes the 15 percent rate applies to dispositions on or after February 17, 2016 (it was 10 percent before). Special rules apply to foreign corporations and certain distributions.

Worked example, using the statute’s rates: a foreign owner sells a house for $600,000 to a buyer who will live in it. The 10 percent reduced rate gives $60,000 withheld. If the buyer is an investor, 15 percent gives $90,000 withheld. These are deposits toward the seller’s tax, not the final tax.

What is the $300,000 exception?

The IRS says no withholding is required if the buyer acquires the property for use as a residence and the price is not more than $300,000. The buyer must be an individual. The buyer or a family member must have definite plans to live in it for at least 50 percent of the days it is used in each of the first two 12-month periods after transfer, not counting vacant days. The notification requirements still apply.

What other exceptions exist?

The IRS lists several. The most common at a residential closing:

• The seller is not a foreign person. The seller gives a written certification under penalties of perjury with their name, U.S. taxpayer identification number and home address. A closing company or the buyer’s agent can hold it as a “qualified substitute.”
• A withholding certificate. The seller or buyer applies to the IRS on Form 8288-B. The IRS can set a reduced amount, or none, if it will not jeopardize collection. The statute says the IRS must act on a request within 90 days (1445(c)(3)(B)).
• A nonrecognition notice. The seller gives written notice that no gain or loss is recognized under the Code or a treaty. The buyer sends a copy to the IRS by the 20th day.

A certification does not protect anyone who has actual knowledge it is false.

How is the money paid and credited?

1. The buyer files Form 8288 and pays by the 20th day after the date of the disposition. If Form 8288-B was filed on or before the closing date and is pending, the buyer still withholds, but the deadline moves to 20 days after the IRS mails its decision.
2. The buyer prepares Form 8288-A for each seller. The IRS stamps Copy B and sends it to the seller.
3. The seller files a U.S. income tax return and attaches the stamped Copy B to get credit. If the seller’s taxpayer number is missing, no stamped copy is issued, and the seller must attach closing documents and a statement instead.

Both the buyer and the foreign seller need a U.S. taxpayer identification number on the forms. For an individual seller without a Social Security number, that means an ITIN; see ITIN for property buyers. If the withholding exceeds the real tax, the seller claims the difference as a refund on the return.

Where states differ

FIRPTA is federal and the same in every state. Your state may also tax the gain, and transfer taxes and closing costs are set locally. Compare transfer tax and closing costs by state, or use the transfer tax calculator. For the sale side, read capital gains on a home sale and selling an inherited home.