What Is an IRS 1445 Letter for FIRPTA Withholding?

The Foreign Investment in Real Property Tax Act (FIRPTA) ensures foreign sellers of U.S. real estate meet their tax obligations. Under this law, when a foreign person sells U.S. property, the buyer must act as a withholding agent. This involves withholding a portion of the gross sales price, often 15%, to cover the seller’s potential capital gains tax liability.

The rate is reduced to 10% if the buyer intends to use the property as their primary residence and the sale price is more than $300,000 but not more than $1 million. No withholding is required if the sale price is $300,000 or less and the buyer will use the property as a residence. The amount withheld is remitted to the Internal Revenue Service (IRS).

This withholding is a prepayment of the seller’s estimated tax, and the actual tax owed might be less. To address this, a seller can apply to the IRS for a withholding certificate. If approved, this document authorizes the buyer to withhold a reduced amount or nothing at all, aligning the withholding with the transaction’s details.

Purpose of a Withholding Certificate

The primary function of a withholding certificate is to align the amount of money withheld at closing with the seller’s probable actual tax liability. The standard withholding on the gross sales price does not account for the property’s original cost or selling expenses, often resulting in a withheld amount that far exceeds the capital gains tax due. By applying for a certificate, a foreign seller can reduce this upfront payment.

The IRS may grant a withholding certificate under several circumstances. The most common reason is a determination that the standard withholding exceeds the seller’s maximum tax liability. This involves presenting a detailed calculation to the IRS showing that the tax on the actual gain is less than the required withholding. This situation occurs when the seller has a high basis in the property or substantial selling costs.

Another basis for obtaining a certificate is when the seller is exempt from U.S. tax on the gain, often due to a provision within an international tax treaty. A certificate may also be issued if the transaction qualifies for a nonrecognition provision under the Internal Revenue Code, such as a like-kind exchange.

Required Information for the Application

To request a reduction in FIRPTA withholding, the seller, buyer, or an agent for either party must file Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. The application must be completed accurately to avoid rejection or delays.

The form mandates the inclusion of full names, addresses, and U.S. Taxpayer Identification Numbers (TINs) for both the foreign seller and the buyer. If a seller does not have a TIN, they can apply for an Individual Taxpayer Identification Number (ITIN) by attaching Form W-7 to the Form 8288-B submission. The application also requires a description of the property, its location, transaction dates, and the contract price.

A central component of the application is demonstrating the basis for the certificate. This requires a calculation of the seller’s maximum tax liability. The calculation begins with the gross sales price, from which the seller’s adjusted basis and selling expenses are subtracted to determine the realized gain. This gain is then multiplied by the applicable long-term capital gains tax rate to arrive at the maximum tax the seller would owe.

The Submission and Approval Process

Once Form 8288-B is completed, the application must be submitted to the designated IRS processing center on or before the date of the property transfer or closing. The seller is also required to provide written notice to the buyer on or before the closing day, informing them that a withholding certificate has been applied for.

The IRS has a 90-day window to process a complete Form 8288-B application. During this period, the buyer is still legally obligated to withhold the applicable percentage of the sales price at closing. The money is held in an escrow account managed by a title company or closing agent, pending the IRS’s decision on the application.

Upon approval, the IRS issues the withholding certificate, which will specify the precise amount of tax that must be withheld. After the certificate is mailed by the IRS, the buyer has 20 days to file Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A. The buyer then sends the adjusted withholding amount to the IRS, and the remaining funds held in escrow are released to the foreign seller.