The Foreign Investment in Real Property Tax Act (FIRPTA) requires most foreigners who sell or otherwise dispose of U.S. real property to pay capital gains tax on any profits. To make sure the tax is collected, the law also usually requires the buyer to withhold 15% of the purchase price and send it to the IRS. When the foreign seller files a U.S. tax return, the amount withheld is subtracted from any tax due.
That’s the general FIRPTA withholding rule. But there are several exceptions and special rules that can make FIRPTA withholding more complicated. For instance, in some cases, withholding is allowed at a lower rate or isn’t even necessary at all. So, if you’re buying U.S. real property from a foreign person, let’s take a closer look at the core FIRPTA withholding rules to make sure you have a basic understanding of your responsibilities.
But note that the rules can get tricky – especially when the seller is a business, trust, or estate. That’s why it’s best to consult with a tax professional before moving forward with the purchase of U.S. real property from a foreign person.
Who is subject to FIRPTA withholding?
FIRPTA withholding only comes into play when the seller of U.S. real property is a "foreign person." If the seller is a “U.S. person,” FIRPTA withholding is not necessary. As a result, correctly determining the seller's status is critical, since it dictates whether or not FIRPTA withholding is required.
Under the FIRPTA withholding rules, a “foreign person" generally includes:
- Nonresident aliens,
- Foreign corporations that haven’t elected to be treated as a domestic corporation, and
- Foreign partnerships, trusts, and estates.
On the other hand, a “U.S. person” includes:
- U.S. citizens,
- Resident aliens (e.g., green card holders), and
- Domestic corporations, partnerships, estates, and trusts.
If U.S. real property is jointly owned and sold by a foreign person and a U.S. person, the buyer only has to withhold FIRPTA taxes on the foreign person’s portion of the purchase price. Unless there’s evidence to the contrary, you can allocate 50% of the purchase price to each spouse if a married couple sold the property.
What real property is subject to FIRPTA withholding?
In addition to the foreign person requirement, FIRPTA withholding is only needed for the sale or other disposition (e.g., gift, exchange, liquidation, etc.) of an interest in real property located in the U.S. or the U.S. Virgin Islands. Among other things, this includes the sale or other disposition of:
- Land and natural products of the land (e.g., crops, timber, mines, or wells),
- Buildings and other permanent structures,
- Options to purchase land, buildings, or other improvements to real property, and
- Personal property associated with the use of real property (e.g., moveable walls, machinery, or equipment).
The FIRPTA withholding rules also kick in upon the transfer of an interest in a domestic corporation that was treated as a U.S. real property holding corporation (USRPHC) during the previous five years or the time the seller held the interest, whichever is shorter.
A corporation is generally considered a USRPHC if the fair market value of its U.S. real property interests is at least 50% of the combined fair market values of its:
- U.S. real property interests,
- Interests in real property located outside the U.S., and
- Certain business assets.
A creditor’s interest in U.S. real property doesn’t count for FIRPTA withholding purposes.
Exceptions to FIRPTA withholding requirements
There are a number of exceptions to the FIRPTA withholding rules. For example, withholding isn’t required in the following situations:
Purchase of residence for $300,000 or less. If you buy U.S. real property to be used as your primary residence and the sales price is $300,000 or less, no withholding is required.
Certification of nonforeign status. Withholding is generally not required if the buyer receives a “certification of nonforeign status” from the seller, signed under penalties of perjury, stating that the seller isn’t a foreign person. However, withholding is still required if the buyer knows or is told that the certification is false.
Sale of interest in a publicly traded corporation. The FIRPTA withholding rules don’t apply to the sale of an interest in a domestic corporation if any class of its stock is regularly traded on an established securities market. This exception doesn’t apply to certain sales of non-publicly traded interests in a publicly traded corporation.
Statement of non-U.S. real property interest. Withholding isn’t required for the sale of an interest in a domestic corporation if the corporation gives the buyer a statement saying that the interest is not a U.S. real property interest (e.g., the corporation wasn’t treated as a U.S. real property holding corporation during the required time period). The statement must be dated 30 days or less before the sale. Withholding is necessary if you know the statement is false or you receive notice that it’s false.
Nonrecognition of gain or loss. No withholding is required if the seller sends the buyer a notice, signed under penalties of perjury, stating that the seller won’t recognize gain or loss on the sale because of a nonrecognition provision in the tax code (e.g., a 1031 exchange) or a provision in a U.S. tax treaty. The buyer must send a copy of the notice to the IRS within 20 days after the sale. Withholding is required if only part of the seller’s gain qualifies for nonrecognition, or you know (or have reason to know) that the seller’s gain isn’t entitled to nonrecognition.
Withholding certificate issued by the IRS. The IRS can issue a withholding certificate excusing FIRPTA withholding if:
- The seller is exempt from U.S. tax, or
- The buyer or seller enters into an agreement with the IRS for the payment of the required tax.
Either a buyer or seller can apply for the certificate. In certain cases, you must use IRS Form 8288-B to apply for this type of withholding certificate.
Seller isn’t paid. Withholding isn’t required if the seller realized $0 on the sale (e.g., the property is transferred as a gift).
Options to acquire property. While withholding is required on the sale, exchange, or exercise of an option to purchase an interest in U.S. real property, no withholding is required for any amount paid upon the grant or lapse of an option.
Property acquired by the government. Withholding is generally not required if an interest in U.S. real property is acquired by the U.S. government, a state or possession, a political subdivision, or the District of Columbia.
Amount of FIRPTA withholding
If FIRPTA withholding is required, the buyer generally must withhold 15% the total amount realized by the seller. The amount realized is equal to the total of:
- Cash paid, or to be paid (principal only),
- The fair market value of other transferred property, or property to be transferred, and
- Any liability assumed by the buyer or to which the sold property is subject immediately before and after the sale.
The withholding rate drops to 10% if the U.S. real property is purchased for use as a residence and is sold for $1 million or less.
Instead of completely eliminating the withholding requirement, the IRS can also issue a withholding certificate to reduce the withholding rate. For instance, this might happen if:
- The amount to be withheld at the 15% rate would be more than the seller's maximum tax liability, or
- Withholding at a reduced amount wouldn’t jeopardize the collection of taxes due from the seller.
Use Form 8288-B to request reduced withholding.
TurboTax Tip: A foreign seller requesting a withholding certificate on Form 8288-B to reduce or cancel FIRPTA withholding must provide a taxpayer identification number. If the seller doesn’t qualify for a Social Security number, he or she can apply for an Individual Taxpayer Identification Number (ITIN) by attaching Form 8288-B to a Form W-7 and mailing the required documents to the IRS..
Reporting and paying withheld FIRPTA taxes
If you buy U.S. real property from a foreign person, use IRS Form 8288 to report FIRPTA withholding to the IRS. Complete a Form 8288-A for each foreign person subject to withholding, too. You generally have 20 days after the sale to submit the forms.
Both the buyer’s and seller’s taxpayer identification numbers must be included on Form 8288-A. Foreign sellers who don’t qualify for a Social Security number can request an ITIN using Form W-7.
Let a local tax expert matched to your unique situation get your taxes done 100% right with TurboTax Live Full Service. Your expert will uncover industry-specific deductions for more tax breaks and file your taxes for you. Backed by our Full Service Guarantee.
You can also file taxes on your own with TurboTax Premium. We’ll search over 500 deductions and credits so you don’t miss a thing.
