Withholding of Tax on Dispositions of United States Real Property Interests
United States tax law requires that all persons, whether foreign or domestic, must pay income tax on dispositions of interests in U.S. real estate (U.S. real property interests). Domestic persons are subject to this tax as part of their regular income tax. Internal Revenue Code sections 897 and 6039C were enacted in FIRPTA; the Act also made conforming amendments to various other provisions of the Internal Revenue Code.
Foreign persons are taxed only on certain items of income, including effectively connected income and certain U.S. source income. Foreign persons, however, are not taxed on most capital gains. Internal Revenue Code section 897, as enacted by FIRPTA, treats the gain on a disposition of an interest in United States real property as effectively connected income subject to regular federal income tax.
To ensure tax collection from foreign taxpayers, FIRPTA requires buyers of U.S. real property interests to withhold 10% of the sales price. The seller may apply to the Internal Revenue Service (IRS) to reduce this 10% to the amount of tax estimated to be due. The IRS routinely and quickly approves such seller applications.
FIRPTA applies in virtually all cases where a foreign owner of a U.S. real property interest disposes of that interest. Provisions of the law which would prevent recognition of gain generally do not apply unless the seller receives a U.S. real property interest in a qualifying nonrecognition exchange.
Exceptions from FIRPTA Withholding
Generally you do not have to withhold in the following situations; however, notification requirements must be met:
- You (the transferee) acquire the property for use as a home and the amount realized (generally 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 the property is used, do not count the days the property will be vacant.
- The property disposed of (other than certain dispositions of nonpublicly traded interests) is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, if the class of stock had been held by a foreign person who beneficially owned more than 5% of the fair market value of that class at any time during the previous 5-year period, then that interest is a U.S. real property interest if the corporation qualifies as a United States Real Property Holding Corporation (USRPHC), and you must withhold on any disposition.
- 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. Generally, the corporation can make this certification only if the corporation was not a USRPHC during the previous 5 years (or, if shorter, the period the interest was held by its present owner), or 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 Internal Revenue Code. The certification must be dated not more than 30 days before the date of transfer.
- 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).
- You receive a withholding certificate from the Internal Revenue Service that excuses withholding. Refer to Withholding Certificates.
- 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:
- Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409.
- The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
- The property is acquired by the United States, a U.S. state or possession, a political subdivision thereof, or the District of Columbia.
- 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.
- The disposition (other than certain dispositions of nonpublicly traded interests) is of publicly traded partnerships or trusts. However, if an interest in a publicly traded partnership or trust was owned by a foreign person with a greater than 5% interest at any time during the previous 5-year period, then that interest is a U.S. real property interest if the partnership or trust would otherwise qualify as a USRPHC if it were a corporation, and you must withhold on it.
If you have questions, I’ll suggest you to contact a Tax Attorney or a Certified Public Accountant (CPA).