What is a FIRPTA Withholding Obligation 

What is a FIRPTA Withholding Obligation

FIRPTA Withholding Obligation 

What is a FIRPTA Withholding Obligation: When a U.S. Citizen or Long-Term Lawful Permanent Resident formally expatriates from the United States, it is not uncommon for the Expatriate (now Nonresident Alien) to maintain ownership or interest in US Real Estate Property. It may be that that the nonresident continues using the United States real estate property for when they visit the United States, for family members — or as a rental property to generate income. Nevertheless, since the expatriate is now a nonresident alien, the question becomes what happens when the Taxpayer wants to sell the property (FIRPTA may apply in various scenarios, but the sale of US property is the most common). Since the owner is now considered a nonresident alien, they unfortunately have the IRS headache of FIRPTA (Foreign Investment In Real Property Tax Act) to contend with at the time of sale. Unfortunately, FIRPTA typically requires a withholding at the time of acquisition that is equivalent to 15% of the sale price (not the purported gain) — unless certain certificates are applied for using Internal Revenue Service Form 8288-B. Let’s go through some of the basics of the FIRPTA Withholding Obligation.

What is FIRPTA?

The idea behind FIRPTA, is that while some US-based capital gains for nonresident aliens is not taxable in the US — that does not include the sale of US real estate — which is taxable, even to nonresident aliens. And, the IRS want to be sure nonresident aliens pay US tax on US Real Estate gains. In other words, when a nonresident alien owns US real estate and sells it, they must pay tax on the gain (absent any exception or exclusion). And, the IRS withholding amount is 15% of the sale pricenot the gain — which means the IRS may be withholding a significant amount of gain that would not be taxable. 

FIRPTA Withholding Obligation Avoided by Form 8288-B Certificate?

The general purpose is to reduce withholding — especially in situations in which the tax on the total gain is below the withholding amount.

As provided by the IRS:

      • Use Form 8288-B to apply for a withholding certificate to reduce or eliminate withholding on dispositions of U.S. real property interests by foreign persons, but only if the application is based on: 

      • A claim that the transferor is entitled to nonrecognition treatment or is exempt from tax, 

      • A claim solely on a calculation that shows the transferor’s maximum tax liability is less than the tax otherwise required to be withheld, or

      • A claim that the special installment sales rules described in section 7 of Rev. Proc. 2000-35 allowed reduced withholding.

      • Do not use this form for applications: 

        • Based on an agreement for the payment of tax with conforming security,

        • For blanket withholding certificates under Rev. Proc. 2000-35, or

        • Other than the three types described above.

          • See Regulations sections 1.1445-3 and 1.1445-6 and Rev. Proc. 2000-35 for information and procedures for applying for a withholding certificate.

Application for FIRPTA Withholding Certificate for Dispositions by Foreign Persons

The FIRPTA withholding form can seem overwhelming, but in comparison to other international information reporting forms, it is not too bad.

As provided by the IRS:

      • Name of transferor (attach additional sheets if more than one transferor)

        • Identification number Street address, apt. or suite no., or rural route.

        • Do not use a P.O. box. City, state or province, and country (if not U.S.). Include ZIP code or postal code where appropriate.

      • Name of transferee (attach additional sheets if more than one transferee)

        • Identification number Street address, apt. or suite no., or rural route.

        • Do not use a P.O. box. City, state or province, and country (if not U.S.). Include ZIP code or postal code where appropriate.

      • Applicant is: Transferor Transferee

      • Name of withholding agent (see instructions)

        • Identification number

        • Name of estate, trust, or entity (if applicable) 

        • Identification number

      • 5 Address where you want withholding certificate sent (street address, apt. or suite no., P.O. box, or rural route number)

        • Phone number (optional)

        • City, state or province, and country (if not U.S.). Include ZIP code or postal code where appropriate.

      • Description of U.S. real property transaction:

        • Date of transfer (month, day, year) (see inst.)

        • Contract price $

        • Type of interest transferred: Real property Associated personal property Domestic U.S. real property holding corporation 

        • Use of property at time of sale: Rental or commercial Personal Other (attach explanation)

        • Adjusted basis $

        • Location and general description of property (for a real property interest), description (for associated personal property), or the class or type and amount of the interest (for an interest in a U.S. real property holding corporation). See instructions.

        • For the 3 preceding tax years:

          • Were U.S. income tax returns filed relating to the U.S. real property interest?

            • If “Yes,” when and where were those returns filed? ?

          • Were U.S. income taxes paid relating to the U.S. real property interest? 

            • If “Yes,” enter the amount of tax paid for each year ?

      • Check the box to indicate the reason a withholding certificate should be issued.

        • See the instructions for information that must be attached to Form 8288-B.

          • The transferor is exempt from U.S. tax or nonrecognition treatment applies.

          • The transferor’s maximum tax liability is less than the tax required to be withheld.

          • The special installment sales rules described in section 7 of Rev. Proc. 2000-35 allow reduced withholding.

      • Does the transferor have any unsatisfied withholding liability under section 1445?

        • See the instructions for information required to be attached.

      • Is this application for a withholding certificate made under section 1445(e)?

        • If “Yes,” check the applicable box in a and the applicable box in b below. 

          • Type of transaction: 1445(e)(1) 1445(e)(2) 1445(e)(3) 1445(e)(5) 1445(e)(6)

          • Applicant is: Taxpayer Other person required to withhold. Specify your title (e.g., trustee)

IRS Explanation of the Withholding Certificate

Sometimes it can help Taxpayers to understand an IRS form by reviewing the explanation provided by IRS, as to what the overall purpose of the form is — and who can apply using the form. (reproduced below).

FIRPTA Withholding Certificate

    • The IRS can issue a withholding certificate to reduce or eliminate withholding under section 1445. A certificate issued before the transfer notifies the transferee that reduced withholding or no withholding is required. A certificate issued after the transfer may authorize an early or a normal refund. If, on the date of transfer, an application for a withholding certificate is or has been submitted to the IRS, the applicable withholding is not required to be paid over to the IRS until the 20th day after the day that the IRS mails the withholding certificate or notice of denial.

    • A transferor that applies for a withholding certificate must notify the transferee in writing that the certificate has been applied for on the day of or prior to the transfer. The IRS will normally act on an application within 90 days of receipt of all information necessary to make a proper determination.

    • The IRS will determine whether withholding should be reduced or eliminated or whether a withholding certificate should not be issued. Identification number. The U.S. taxpayer identification number (TIN) of all parties to the transaction must be on the application for a withholding certificate. For U.S. individuals, the TIN is a social security number (SSN).

    • For all other entities, it is an employer identification number (EIN). If you do not have an EIN, you can apply for one online at www.irs.gov/smallbiz or by telephone at 1-800-829-4933.

    • Also, you can file Form SS-4, Application for Employer Identification Number, by fax or mail. If you are a nonresident alien individual who is required to have a TIN, but is not eligible to obtain an SSN, you must apply for an IRS individual taxpayer identification number (ITIN).

    • If you do not have a TIN and are eligible for an ITIN, you can apply for an ITIN by attaching the completed Form 8288-B to a completed Form W-7 and forwarding the package to the IRS at the address given in the Form W-7 instructions. Get Form W-7, Application for IRS Individual Taxpayer Identification Number, for more information.

    • Any withholding certificate issued by the IRS applies only for the limited purpose of determining the withholding obligation under section 1445 and does not apply to any substantive issue that may arise in connection with the transfer. The acceptance by the IRS of any evidence submitted in connection with this application is not binding on the IRS for any purpose other than issuing the withholding certificate. The information submitted in support of the application may be subject to verification by the IRS prior to issuance of a withholding certificate.

    • If you receive a withholding certificate from the IRS and withholding is still required, a copy of the withholding certificate must be attached to Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests.

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