How to Pay TDS on Purchase of Property

Understanding FIRPTA Withholding on Property Purchases

When purchasing real estate in the United States, buyers often focus on property value, location, and financing. However, in certain circumstances, buyers must withhold a portion of the purchase price and remit it to the Internal Revenue Service (IRS). This obligation primarily arises under the Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA ensures that foreign individuals or entities selling U.S. real property interests pay their required U.S. income tax on the disposition. Understanding these specific withholding requirements is important for buyers to ensure compliance and avoid potential liabilities.

FIRPTA Applicability and Calculation for Foreign Seller Property Purchase

FIRPTA withholding applies when the seller, or transferor, is considered a “foreign person” under U.S. tax law. A foreign person includes nonresident alien individuals, foreign corporations not elected to be treated as domestic, and foreign partnerships, trusts, or estates. This withholding acts as an advance payment toward the foreign seller’s potential U.S. income tax liability on the sale.

The standard FIRPTA withholding rate is 15% of the gross sales price of the U.S. real property interest. This applies to the total amount realized by the seller, which includes cash paid, the fair market value of any other property transferred, and any liabilities assumed by the buyer. For example, a $500,000 property sale would typically require the buyer to withhold $75,000. It is important to note that this withholding is applied to the gross sales price, not just any profit the seller might realize from the sale.

Exceptions and reduced rates may apply. If the sales price is $300,000 or less and the buyer intends to use the property as their personal residence for at least half of the first two years, no withholding may be required. For sales between $300,001 and $1,000,000, if the property will be used as the buyer’s residence, a reduced 10% withholding rate may apply. Determining the seller’s foreign status is a key initial step, often facilitated by a “non-foreign affidavit” from the seller at closing, certifying their U.S. tax status. Buyers who fail to withhold the required amount may be liable for the uncollected tax, interest, and penalties.

Information Required for FIRPTA Withholding

Buyers must gather specific information for themselves, the foreign seller, and the property before initiating the FIRPTA withholding process. Accurate collection of this data is essential for proper compliance with IRS regulations. Required buyer information includes their Taxpayer Identification Number (TIN) – SSN, ITIN, or EIN – full name, and current address. This identifies the entity responsible for withholding.

For the foreign seller, their TIN, full name, and address are equally important. Without a valid TIN, the seller may face a higher withholding rate, and the IRS may not properly credit the withholding. Property details needed include the complete address of the U.S. real property interest being sold, the gross sales price, and the date of the property transfer. These details ensure correct association with the specific transaction.

All collected information is used to complete IRS Form 8288, “U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests,” and Form 8288-A, “Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.” Form 8288 is used by the buyer to report and remit the withheld tax. Form 8288-A serves as a statement for the seller to claim credit when filing their U.S. income tax return.

Step-by-Step Withholding Process

After gathering the necessary information, the buyer can complete and submit the required FIRPTA forms and remit funds to the IRS. The buyer must carefully complete Form 8288, entering their identifying information as the transferee, the foreign seller’s details as the transferor, and all transaction specifics, including gross sales price and calculated withholding. Accuracy in completing these forms is crucial to avoid processing delays and potential issues.

Form 8288-A must also be prepared for each foreign seller, including buyer and seller identifying information and the withheld amount. Both forms must be mailed to the IRS within 20 days from the property transfer date to avoid penalties.

Payment can be made by check or money order, attached to Form 8288 when mailed. Alternatively, electronic payment is available through the Electronic Federal Tax Payment System (EFTPS) or IRS Direct Pay. When paying electronically, ensure the payment is correctly associated with Form 8288 by selecting the appropriate tax type and period. Buyers should retain copies of all submitted forms and payment confirmations.

Issuing Form 8288-A to the Seller

After submitting Form 8288 and Form 8288-A with the withheld funds, buyers must ensure the foreign seller receives proper documentation. The IRS processes the forms and, upon acceptance, stamps Copy B of Form 8288-A. This stamped copy is then mailed directly by the IRS to the foreign seller. This official, IRS-stamped Form 8288-A serves as the seller’s proof that the tax was withheld and remitted on their behalf.

This document allows the foreign seller to claim credit for the withheld tax against their U.S. income tax liability when filing their return for the sale year. Buyers should retain Copy C of Form 8288-A for their records. While buyers do not directly issue the stamped Form 8288-A, they are responsible for filing the correct forms with the IRS so the seller receives necessary documentation. Timely filing by the buyer is essential for the seller to receive their stamped Form 8288-A, which can be attached to their tax return to claim credit and potentially receive a refund.