U.S Withholding Tax Return for Certain Dispositions by Foreign persons
Form 8288 is the go-to document for reporting and remitting withheld amounts from specific transactions and distributions governed by sections 1445...
The sale or transfer of U.S. real property interests by a foreign individual (the transferor) falls under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which mandates income tax withholding. FIRPTA grants the United States the authority to tax foreign individuals on the sale of U.S. real property interests.
The Foreign Investment in Real Property Tax Act (FIRPTA) Withholding is a tax charged by the United States Federal Government to foreign investors who deal in real estate. The government passed the law in 1980 to ensure that all non-resident alien individuals and foreign corporations pay their fair share of US tax on income generated from direct or indirect investments in US real estate.
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A U.S. real property interest refers to a stake, excluding that of a creditor, in real property situated in the United States or the U.S. Virgin Islands. This includes interests in mines, wells, or other natural deposits, and extends to certain personal property tied to the use of real property, like farming equipment.
In the case of any domestic corporation, it must be established that the corporation was not a U.S. real property holding corporation at any time during the shorter of the period in which the interest was held or the five years ending on the date of disposition (the applicable periods).
An interest in a corporation is not a U.S. real property interest if:
The transferee is required to deduct and withhold tax from the total amount realized by the foreign person upon disposition. Generally, the withholding rate is 15%, although it was 10% for dispositions occurring before February 17, 2016.
The amount realized is the sum of:
If the property transferred is owned by a foreign person and at least one other person, 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 who are foreign persons.
A domestic corporation must withhold tax on the fair market value of the property distributed to a foreign shareholder if:
Throughout the transaction, the state will require you to submit forms. Remember that withholding tax is not a final tax. Report this annually with your annual tax returns.
The forms needed during a FIRPTA withholding transaction include:
At H&CO, our experienced team of tax professionals (CPAs) understand the complexities of income tax preparation and are dedicated to guiding you through the process. With a personalized approach, we help you navigate US and international income tax laws, staying up to date with the latest changes.
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