What Are the FIRPTA Section 1445 Withholding Rules?

The Foreign Investment in Real Property Tax Act, or FIRPTA, is a 1980 federal law designed to ensure the U.S. government collects income tax when foreign persons sell their interests in United States real estate. To enforce this, Internal Revenue Code Section 1445 acts as the collection mechanism. This section shifts the responsibility of tax collection from the seller to the buyer. In a transaction subject to these rules, the buyer acts as a withholding agent for the Internal Revenue Service (IRS), meaning they must deduct a portion of the sales price and send it directly to the IRS on behalf of the foreign seller.

Determining FIRPTA Applicability

FIRPTA imposes a withholding obligation on the buyer in a real estate transaction. When a U.S. real property interest is purchased from a foreign person, the buyer is required to withhold 15% of the total amount realized from the sale. The “amount realized” is the gross sales price of the property. This includes cash paid to the seller, the fair market value of any other property or services transferred, and the amount of any liabilities assumed by the buyer.

The rule applies if the seller is a “foreign person.” For FIRPTA purposes, a foreign person is a non-resident alien individual, a foreign corporation, or a foreign partnership, trust, or estate. A non-resident alien is someone who is not a U.S. citizen and does not meet either the “green card test” or the “substantial presence test.” Conversely, a U.S. person is a citizen or resident alien, a domestic partnership or corporation, or a domestic trust or estate.

The withholding requirement applies to the disposition of a “U.S. real property interest” (USRPI). This refers to direct ownership of land and any buildings on it, but the definition is broader. A USRPI can also include an interest in a domestic corporation if that corporation was a U.S. real property holding corporation (USRPHC). A corporation qualifies as a USRPHC if the fair market value of its U.S. real property interests equals 50% or more of its combined worldwide assets.

Exemptions and Reductions to Withholding

Several exemptions can eliminate or reduce the amount a buyer must withhold. The most common method for a buyer to be relieved of the withholding obligation is by obtaining a certification of non-foreign status from the seller. This is a sworn affidavit, signed by the seller under penalty of perjury, that states the seller is not a foreign person and provides their U.S. Taxpayer Identification Number (TIN). A buyer can rely on this affidavit unless they have actual knowledge that the certification is false.

An exemption is available when the property will be used as the buyer’s personal residence, with rules based on the sales price. If the amount realized is $300,000 or less, no withholding is required. If the sales price is greater than $300,000 but does not exceed $1,000,000, the withholding rate is reduced to 10%. For personal residence purchases exceeding $1,000,000, the full 15% withholding rate applies. To qualify for the exemption or reduction, the buyer or a family member must have definite plans to reside at the property for at least 50% of the days it is used during each of the first two 12-month periods following the transfer.

A foreign seller can also apply to the IRS for a withholding certificate to reduce or eliminate the amount withheld. This is done by filing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. This process is used when the 15% withholding on the sales price would be more than the seller’s actual tax liability, such as when the seller has a low gain or a loss on the sale. While the application is pending with the IRS, the buyer must still withhold the full amount at closing. However, the buyer is not required to report and pay the withholding to the IRS until the 20th day after the IRS mails a copy of the withholding certificate or a notice of denial.

Information and Forms for Withholding

When withholding is required, the buyer must collect specific information to complete the necessary IRS forms. This includes:

• Full names, addresses, and U.S. Taxpayer Identification Numbers (TINs) for both the buyer and the foreign seller
• A description of the property
• The date of the transfer
• The total amount realized
• The exact amount withheld

The form used to report and transmit the withheld funds to the IRS is Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests. Attached to Form 8288 are copies of Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. The buyer prepares a separate Form 8288-A for each foreign seller. After the IRS processes the filing, it will stamp Copy B of Form 8288-A and mail it to the foreign seller. This stamped form is the seller’s proof of the withholding payment, which they must attach to their U.S. income tax return to receive credit for the tax paid.

The Withholding and Reporting Process

The FIRPTA process begins at the closing of the real estate transaction, where the required withholding amount is set aside from the seller’s proceeds. The buyer has a deadline to submit the payment and the required forms to the IRS. The completed Form 8288, along with all copies of Form 8288-A and the withheld funds, must be sent to the IRS within 20 days of the date of transfer. The date of transfer is when title to the property officially passes to the buyer.

Once the buyer has remitted the funds and forms to the IRS, their obligation under FIRPTA is complete. The foreign seller must then file a U.S. income tax return, such as a Form 1040-NR for individuals, to report the sale. On this return, they calculate the actual tax due on the gain and claim the amount withheld as a tax payment using their stamped Copy B of Form 8288-A.