What Is FIRPTA Withholding?

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.

What Is FIRPTA Withholding?

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. 

Learn more about our Tax Services.

U.S. Real Property Interest

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:

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 an RIC or a REIT during the shorter of the applicable periods during which the interest was held.

Rates of Withholding

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:

• 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 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:

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

What Papers Do I Need to Show or Can the IRS Ask Me About them? 

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: 

• Form 8288, is used to report income from any US source and pay taxes on such income. 
• Form W-8BEN required any nonresident alien individual or foreign entity to claim beneficial treatment, including reduced withholding under an income tax treaty. It certifies that such person or entity is not a US citizen and establishes residence status in another country. 
• Form W-9 is required before an entity can hire a nonresident alien individual who requests a taxpayer identification number (TIN). 
• Lastly, you may be asked for a certificate of compliance that certifies that your withholding agent has withheld according to the FIRPTA law. 

How H&CO can help you

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. 

To learn more about our accounting firm's services, take a look at our Individual Tax Services, Business Tax Services, International Tax Services, Expat Tax Services, SAP Business One, Entity Management, Capital human resources, and audit and assurance services.