What is FIRPTA Withholding?

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.

A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition (special rules for foreign corporations).

In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer, you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.

U.S. Real Property Interest

A U.S. real property interest is an interest, other than as a creditor, in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of real property (such as farming machinery). It also means any interest, other than as a creditor, in any domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or the 5-year period ending on the date of disposition (applicable periods).

An interest in a corporation is not a U.S. real property interest if:

1. Such corporation did not hold any U.S. real property interests on the date of disposition,
2. All the U. S. real property interests held by such corporation 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, and
3. For dispositions after December 17, 2015, such corporation and any predecessor of such corporation was not a RIC or a REIT during the shorter of the applicable periods during which the interest was held.

Rates of Withholding

The transferee must deduct and withhold a tax on the total amount realized by the foreign person on the disposition. The rate of withholding generally is 15% (10% for dispositions before February 17, 2016).

The amount realized is the sum of:

• The cash paid, or to be paid (principal only);
• The fair market value of other property transferred, or to be transferred; and
• The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.

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.

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 21% of the gain it recognizes on the distribution to its shareholders.

A domestic corporation must withhold tax on the fair market value of the property distributed to a foreign shareholder if:

• The shareholder’s interest in the corporation is a U.S. real property interest, and
• The property distributed is either in redemption of stock or in liquidation of the corporation.

Exceptions from 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 residence and the amount realized (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 that the property is used, do not count the days the property will be vacant. For this exception, the transferee must be an individual.
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, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded corporations.
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. In most cases, the corporation can make this certification only if either of the following is true.
   • During the previous 5 years (or, if shorter, the period the interest was held by its present owner), the corporation was not a USRPHC.
   • As of the date of disposition, the interest in the corporation is not a U.S. real property interest by reason of section 897(c)(1)(B) of the 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. The transferor can give the certification to a qualified substitute. The qualified substitute gives you a statement, under penalties of perjury, that the certification is in the possession of the qualified substitute. For this purpose, a qualified substitute is (a) the person (including any attorney or title company) responsible for closing the transaction, other than the transferor’s agent, and (b) the transferee’s agent.
6. You receive a withholding certificate from the Internal Revenue Service that excuses withholding. See Withholding Certificates , later.
7. 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 Ogden 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, 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 an interest in a publicly traded partnership or trust. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded partnerships or trusts.

For more information go to:
https://www.irs.gov/individuals/international-taxpayers/firpta-withholding