Withholding of Tax on Dispositions of United States Real Property Interests
The disposition of a U.S. 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 authorized the United States to tax foreign persons on dispositions of U.S. real property interests. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc.
U.S. Real Property Interest
A U.S. real property interest is any interest, other than solely as a creditor, in real property (including an interest in a mine, well, or other natural deposit) located in the United States If on the date of disposition, the corporation did not hold any U.S. real property interests, and all the interests held at any time during the shorter of the applicable periods were disposed of in transactions in which the full amount of any gain was recognized, then FIRPTA withholding would not apply.
Rates of Withholding
The transferee must deduct and withhold a tax equal to 10% (or other amount) of the total amount realized by the foreign person on the disposition. The amount realized is the sum of
(1) The cash paid, or to be paid (principal only),
(2) the fair market value of other property transferred, or to be transferred, and
(3) the amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer. The amount realized is generally the amount paid for the property. If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor. This is subject to the threshold mentioned in the section on exceptions from FIRPTA Withholding.
A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain it recognizes on the distribution to its shareholders.
A domestic corporation must withhold a tax equal to 10% of the fair market value of the property distributed to a foreign shareholder if (1) the shareholder's interest in the corporation is a U.S. real property interest, and (2) the property distributed is either in redemption of stock or in liquidation of the corporation.
FIRPTA documents are processed at:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409.
Exceptions from FIRPTA Withholding
Generally you do not have to withhold in the following situations; however, notification requirements must be met:
1. You (the transferee) acquire the property for use as a home and the amount realized (generally sales price) is not more than $300,000. You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant.
2. The property disposed of is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, if the class of stock had been held by a foreign person who beneficially owned more than 5% of the fair market value of that class at any time during the previous 5-year period, then that interest is a U.S. real property interest if the corporation qualifies as a United States Real Property Holding Corporation (USRPHC), and you must withhold on any disposition.
3. The disposition is of an interest in a domestic corporation and that corporation furnishes you a certification stating, under penalties of perjury, that the interest is not a U.S. real property interest. Internal Revenue Code. The certification must be dated not more than 30 days before the date of transfer.
4. The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor's name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).
5. You receive a withholding certificate from the Internal Revenue Service that excuses withholding.
6. The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the:
7. Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409.
8. The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
9. The property is acquired by the United States, a U.S. state or possession, a political subdivision thereof, or the District of Columbia.
10. The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale, exchange, or exercise of that option.
11. The disposition is of publicly traded partnerships or trusts. However, if an interest in a publicly traded partnership or trust was owned by a foreign person with a greater than 5% interest at any time during the previous 5-year period, then that interest is a U.S. real property interest if the partnership or trust would otherwise qualify as a USRPHC if it were a corporation, and you must withhold on it.
The certifications in items (3) and (4) are not effective if you have actual knowledge, or receive a notice from an agent, that they are false.
Liability of Agents
The agent's liability is limited to the amount of pay the agent gets from the transaction.
An agent is any person who represents the transferor or transferee in any negotiation with another person (or another person's agent) relating to the transaction, or in settling the transaction. A person is not treated as an agent if the person only performs one or more of the following acts related to the transaction:
· Receipt and disbursement of any part of the consideration,
· Recording of any document,
· Typing, copying, and other clerical tasks,
· Obtaining title Insurance reports and reports concerning the condition of the property, or
· Transmitting documents between the parties.
A Withholding Agent is personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest.
Forms to remit & deadlines - Reporting and Paying Tax on U.S. Real Property Interests
Two forms are generally used for reporting and paying the tax to the IRS regarding the acquisition of U.S. real property interests.
· Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
· Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests
You must include the U.S. TIN of both the transferor and transferee on the forms
For partnerships disposing of U.S. real property interests, the manner of reporting and paying over the tax withheld is the same as discussed For publicly traded trusts and real estate investment trusts, you must use Forms 1042 and 1042-S procedures for reporting and paying over tax withheld on distributions from dispositions of U.S. real property interests. Use Income Codes 24, 25, and 26 on Form 1042-S for transactions involving these entities.
The tax withheld on the acquisition of a U.S. real property interest from a foreign person is reported and paid using Form 8288. Form 8288 also serves as the transmittal form for copies A and B of Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.
Generally, you must file Form 8288 by the 20th day after the date of the transfer.
If an application for a withholding certificate is submitted on Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests to the IRS before or on the date of a transfer and the application is still pending with the IRS on the date of transfer, the correct withholding tax must be withheld, but does not have to be reported and paid immediately. The amount withheld (or lesser amount as determined by the IRS) must be reported and paid within 20 days following the day on which a copy of the withholding certificate or notice of denial is mailed by the IRS.
The withholding agent must prepare a Form 8288–A for each person from whom tax has been withheld. Attach copies A and B of Form 8288–A to Form 8288. Keep Copy C for your records.
IRS will stamp Copy B (provided TIN is included only) and send it to the person subject to withholding. That person must file a U.S. income tax return and attach the stamped Form 8288–A to receive credit for any tax withheld.
Application for Reduced Rate of Withholding
A reduced rate of withholding may be allowed upon the submission and acceptance of Form 8288-B.
The IRS will generally act on these requests within 90 days after receipt of a complete application including the Taxpayer Identification Numbers (TIN’s) of all the parties to the transaction. A transferor that applies for a 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.
All applications for withholding certificates are divided into six basic categories:
1. Applications based on a claim that the transfer is entitled to nonrecognition treatment or is exempt from tax,
2. Applications based solely on a calculation of the transferor's maximum tax liability,
3. Applications under special installment sale rules,
4. Applications based on an agreement for the payment of tax with conforming security,
5. Applications for blanket withholding certificates, and
6. Applications on any other basis.
Use Form 8288-B, for categories (1), (2), and (3) ONLY. to apply for a withholding certificate. The IRS will normally act on an application by the 90th day after a complete application is received. If you receive a withholding certificate from the IRS that excuses withholding, you are not required to file Form 8288. However, if you receive a withholding certificate that reduces (rather than eliminates) withholding, there is no exception to withholding, and you are required to file Form 8288
The application must be sent to:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
All applications for withholding certificates must use the specified format.
Category (4) Applications
If the application is based on an agreement for the payment of tax, the application must include:
1. Information establishing the transferor's maximum tax liability, or the amount that otherwise has to be withheld,
2. A signed copy of the agreement proposed by the applicant, and
3. A copy of the security instrument proposed by the applicant.
Either the transferee or the transferor may enter into an agreement for the payment of tax. There are four major types of security acceptable to the IRS. They are:
1. Bond with surety or guarantor,
2. Bond with collateral,
3. Letter of credit, and
4. Guarantee (corporate transferors).
Category (5) Applications
A blanket withholding certificate may be issued if the transferor holding the U.S. real property interests provides an irrevocable letter of credit or a guarantee A blanket withholding certificate excuses withholding concerning multiple dispositions of those property interests by the transferor or the transferor's legal representative during a period of no more than 12 months.
Category (6) Applications
These are non-standard applications
Requirement for Taxpayer Identification Numbers (TIN’s)
all transferees (buyers) and foreign transferors (sellers) of U.S. real property interests to provide their TIN’s, names and addresses on withholding tax returns, applications for withholding certificates, notice of non-recognition, or elections under sections IRC 897(i) when disposing of a U.S. real property interest.
If the transferor sends Forms 8288 and 8288-A to the IRS for processing but does not list a TIN on the forms and does not attach a Form W-7 ITIN application, the IRS will process the forms, but will not date stamp Form 8288-A "Copy B Mailed" or forward it to the foreign transferor. Instead, the IRS will mail Letter 3794 SC/CG to the foreign transferor, instructing the transferor to apply for an ITIN by filing Form W-7. In order to obtain an ITIN number for FIRPTA purposes you must complete Form W-7 or W-7SP. Select Box "h" (other) in the "Reason you are submitting Form W-7" section of Form W-7, and Exception 4 (explained in the instructions). Write "Exception 4" in the write-in area to the right of Box h (other). If a transferee does not have a TIN, and an amount withheld under section 1445 is due to the IRS, complete Form 8288, 8288-A and mail the forms along with the payment to Internal Revenue Service, Ogden Submission Processing Campus, PO Box 409101, Ogden UT 84409, by the 20th day from the date of the sale.
Form 1099-S, Proceeds From Real Estate Transactions
Generally, the real estate broker or other person responsible for closing the transaction must report the sale of the property to the IRS using Form 1099-S.
Amendments to Applications
An applicant for a withholding certificate may amend an otherwise complete application by sending an amending statement to the Director, Ogden Service Center, at the address shown earlier. There is no particular form required, but the amending statement must provide certain information:If an amending statement is provided, the time in which the IRS must act upon the application is extended by 30 days.
If a domestic partnership that is not publicly traded disposes of a U.S. real property interest at a gain, the gain is treated as effectively connected income would not be subject to withholding under the FIRPTA provisions.
Trust and Estates
You must withhold 35% on any distribution to a foreign beneficiary that is attributable to the balance in the real property interest account on the day of the distribution. A trust with more than 100 beneficiaries may elect to withhold from each distribution 35% of the amount attributable to the foreign beneficiary's proportionate share of the current balance of the trust's real property interest account. This election does not apply to publicly traded trusts or real estate investment trusts (REITs).