What Is a Real Property Holding Company for Tax Purposes?

A Real Property Holding Company (RPHC) is a designation for a corporation with substantial holdings in U.S. real estate. This classification is a component of U.S. tax law designed to ensure that foreign investors are taxed on income they derive from U.S. real property. The status of a corporation as an RPHC carries implications when a foreign shareholder decides to sell their interest in the company.

The determination of whether a company is an RPHC is based on a specific financial test. This classification directly affects how gains from the sale of that company’s stock are treated for tax purposes, potentially subjecting a foreign seller to U.S. income tax where they might otherwise not be.

Determining RPHC Status

A corporation qualifies as a U.S. Real Property Holding Corporation (USRPHC) if the fair market value of its U.S. real property interests equals or exceeds 50% of the total fair market value of its worldwide real property and other business assets. The test must be performed on specific “determination dates” throughout the year. These dates typically include the last day of the corporation’s taxable year and any date on which it acquires a U.S. real property interest or disposes of foreign real property or other business assets.

The numerator of this test is the fair market value of the company’s U.S. Real Property Interests (USRPIs). A USRPI is defined broadly, including more than direct ownership of land and buildings. It encompasses fee ownership, co-ownership, leaseholds, options to acquire such assets, interests in natural deposits, and personal property associated with the use of the real property, such as equipment in a furnished rental property.

An interest in another domestic corporation can also be a USRPI if that second corporation is itself a USRPHC. This look-through provision prevents the use of tiered corporate structures to avoid the classification. Valuation is based on fair market value, which is the price a willing buyer and seller would agree upon, with neither being under compulsion to act and both having reasonable knowledge of the facts.

The denominator of the 50% test includes the value of all USRPIs, plus the fair market value of the corporation’s interests in real property located outside the United States, and its other assets used or held for use in a trade or business. Assets held for business use are those actively employed in conducting the company’s operations, such as machinery and inventory. Assets held for investment or non-imminent future expansion are generally excluded from this calculation.

Tax Implications for Foreign Shareholders

When a foreign person sells stock in a USRPHC, the tax consequences are governed by the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). FIRPTA treats any gain realized from the disposition of a USRPI as “effectively connected with a U.S. trade or business.” This means the foreign shareholder is subject to U.S. tax on that gain at the same graduated rates that apply to U.S. individuals or corporations.

To ensure tax collection, FIRPTA imposes a withholding obligation on the buyer. The purchaser is generally required to withhold 15% of the gross sales price of the stock. This amount must be remitted to the Internal Revenue Service (IRS) within 20 days of the sale using Form 8288 and Form 8288-A.

This 15% withholding is not the final tax liability for the foreign seller. The actual tax is calculated on the net gain from the sale, not the gross proceeds. The foreign shareholder must file a U.S. income tax return, such as Form 1040-NR for individuals, to report the gain and calculate the final tax due. The withheld amount is treated as a payment against this final tax liability, and if the withholding exceeds the actual tax, the seller can claim a refund.

The responsibility for withholding rests on the buyer. A buyer who fails to withhold the required amount can be held personally liable by the IRS for the tax, plus any applicable penalties and interest. This makes the determination of a corporation’s RPHC status a point of due diligence for any party purchasing stock from a foreign seller.

Exceptions to RPHC Treatment

Certain exceptions can relieve a foreign shareholder from the tax and withholding rules of FIRPTA, even if the corporation meets the 50% test. The most common exception applies to interests in a corporation whose stock is “regularly traded on an established securities market.”

Under this exception, the stock of a publicly traded RPHC is not treated as a USRPI for a foreign shareholder who owned 5% or less of that class of stock during a specified testing period. The testing period is generally the five-year period ending on the date of the disposition. This allows small investors to trade shares of publicly listed real estate companies or REITs without triggering FIRPTA obligations.

Another exception exists for a corporation that has disposed of all its USRPIs in transactions where the full amount of any gain was recognized for tax purposes. If a company sells all of its U.S. real estate in fully taxable sales, it can “cleanse” itself of its RPHC status, and its stock will no longer be considered a U.S. real property interest. This rule, however, does not apply to certain entities, including Real Estate Investment Trusts (REITs) and Regulated Investment Companies (RICs).

A foreign corporation that is an RPHC is generally not subject to the same rules upon a sale of its stock. Instead, the tax is imposed at the corporate level if the foreign corporation itself disposes of its U.S. real property interests.

Required Documentation and Certifications

Specific documentation is necessary to confirm the corporation’s status and manage withholding obligations. The most common document is a certification of non-U.S. real property holding corporation status, often called a non-RPHC affidavit. This sworn statement is provided by the corporation to the buyer to certify that it is not, and has not been, a USRPHC during the relevant testing period.

The purpose of this affidavit is to provide the buyer with a legal basis for not withholding the 15% FIRPTA tax. If the buyer receives this certification and has no reason to believe it is false, they are relieved of their withholding duty. The domestic corporation whose stock is being sold is responsible for providing this document. The foreign seller typically requests it as a condition of the sale to ensure they receive the full gross proceeds without withholding.

The certification must contain specific information to be valid. It must state that the corporation is not a USRPHC, provide the corporation’s name, address, and U.S. taxpayer identification number, and be signed by a responsible corporate officer under penalty of perjury. The statement must be dated as of the day of the stock transfer.

Should the corporation be unable to provide this certification because it is a USRPHC, the buyer must proceed with the 15% withholding. A foreign seller may apply to the IRS for a withholding certificate to reduce or eliminate the withholding amount based on their estimated final tax liability. This process requires submitting Form 8288-B to the IRS before the sale occurs.