FIRPTA Withholding

What is FIRPTA Withholding?

When FIRPTA Withholding Applies

FIRPTA withholding applies when a foreign person (individual, corporation, partnership, trust, or estate) disposes of a U.S. real property interest. A “disposition” includes sales, exchanges, liquidations, redemptions, gifts, and certain transfers. The buyer or transferee is responsible for determining the seller’s status as a foreign person and for withholding the required tax. FIRPTA also applies to distributions by domestic or foreign corporations, partnerships, trusts, and estates if the distribution involves a U.S. real property interest. Notably, the law covers not only direct ownership of real estate but also indirect interests, such as shares in a U.S. real property holding corporation.

FIRPTA Withholding Rate and Calculation

The standard FIRPTA withholding rate is 15% of the “amount realized” by the foreign seller, which generally means the total sales price plus the fair market value of any other property transferred and the amount of any liability assumed by the buyer or to which the property is subject. For certain residential properties acquired for use as a residence and sold for $1,000,000 or less, the rate may be reduced to 10%. The buyer must file the appropriate FIRPTA withholding form (Form 8288 and Form 8288-A) with the IRS and remit the withheld funds within 20 days of the transfer. For distributions by corporations, trusts, or estates, the withholding rate may be 21% of the recognized gain.

FIRPTA Exemptions and Reduced Withholding Certificates

There are several FIRPTA withholding exemptions and opportunities for reduced withholding:

• Nonforeign Status: If the seller provides a certification of nonforeign status (such as a valid Form W-9), no withholding is required.
• Sale Price Exemption: If the property is acquired for use as a residence and the amount realized is $300,000 or less, no withholding is required.
• Reduced Withholding: If the property is acquired for use as a residence and the amount realized is more than $300,000 but not more than $1,000,000, the withholding rate is reduced to 10%.
• Withholding Certificate: The seller or buyer may apply for a FIRPTA withholding certificate (using Form 8288-B) to request a reduction or elimination of withholding if the actual tax liability will be less than the standard withholding amount. The IRS generally processes these applications within 90 days of receiving a complete submission.

FAQ

Who is responsible for paying FIRPTA withholding?
The buyer (transferee) is responsible for withholding the required FIRPTA tax from the sales proceeds and remitting it to the IRS. If the buyer fails to withhold, they may be held liable for the tax, including interest and penalties.

Can FIRPTA withholding be refunded?
Yes, if the amount withheld exceeds the seller’s actual U.S. tax liability, the foreign seller can claim the withholding refund by filing a U.S. tax return (Form 1040-NR or 1120-F) and attaching the stamped Form 8288-A as proof of withholding.

Does FIRPTA apply to inherited U.S. real estate?
FIRPTA generally does not apply to property acquired by inheritance. However, if the estate sells the property and distributes proceeds to a foreign beneficiary, FIRPTA withholding may apply to the distribution.

Are there FIRPTA  exemptions for certain sale prices?
Yes, if the property is acquired for use as a residence and the amount realized is $300,000 or less, no FIRPTA withholding is required. For amounts up to $1,000,000, a reduced 10% rate may apply if the buyer intends to use the property as a residence.

How long does it take to receive a FIRPTA withholding refund?
The IRS typically processes FIRPTA withholding refunds within six months after a complete tax return is filed, but processing times can vary. Delays may occur if the required documentation, such as the stamped Form 8288-A, is missing or incomplete.

Additional Considerations

FIRPTA withholding is a key aspect of International Tax compliance for foreign investors in U.S. real estate. Buyers and sellers should be aware of Nexus issues, especially if the transaction involves entities with multistate or international connections. For partnerships and other pass-through entities, Schedules K-2 and K-3 may be required to report international tax items related to FIRPTA transactions. Proper planning and timely submission of the FIRPTA withholding form and any application for a FIRPTA withholding certificate can help avoid unnecessary withholding and facilitate a smoother transaction.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Molly Johnson, partner in charge of Bennett Thrasher’s International Tax practice , or call us at 770.396.2200.