The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires foreign (non-US) individuals and entities to pay tax in the US on gains and losses from the sale of a US Real Property Interest (USRPI), as defined in Treas. Reg. § 1.897-1. USRPI is an interest in real property (other than solely as a creditor) in the US, with certain exceptions. If the seller of a USRPI is a foreign individual or entity and is therefore subject to FIRPTA, the purchaser:
- Is the withholding agent.
- Must withhold 15% of the purchase price (as provided on Form 8288 and 8288-A) to ensure the appropriate taxes are paid unless the seller obtains a withholding certificate from the IRS before the closing.
- Must remit the withholding of tax to the IRS by the 20th day after the date of transfer.
- May be held liable for the tax if the seller does not pay and the purchaser fails to withhold.
Purchase and sale agreements typically require the seller to execute and deliver a FIRPTA certificate at the closing. A signed FIRPTA certificate is sufficient evidence to prove that the purchaser does not have to withhold any of the purchase price for FIRPTA purposes.To sufficiently prove that it is not a foreign individual or entity, the FIRPTA certificate should include:
- A statement from the seller that it is not a foreign individual, corporation, partnership, or estate.
- A statement that the seller is not a disregarded entity under Treas. Reg. § 1.1445-2(b)(2)(iii). A disregarded entity is a trust, limited liability company, corporation, or other entity that is not treated as separate and distinct from the disregarded entity’s owner for US income tax purposes. A disregarded entity cannot provide a FIRPTA certification because the owner of the disregarded entity (and not the disregarded entity) is considered to be the transferor of the USRPI. If the owner of the disregarded entity is a foreign (non-US) entity, the owner is subject to the FIRPTA withholding requirements. To avoid potential liability and withholding requirements, the purchaser requires that the seller certify that it is not a disregarded entity.
- The seller’s employer identification number (EIN) or social security number if the seller is an individual.
- The seller’s address.
Failure to have the FIRPTA certificate signed and delivered by the seller may delay the closing because the purchaser does not want to risk potential liability for the taxes owed by a foreign (non-US) seller. Additionally, the purchaser’s lender may require this FIRPTA certificate from the seller at the closing before issuing the loan.If the purchaser cannot obtain a FIRPTA certificate (usually because the seller is a foreign (non-US) entity), before the closing can occur, either:
- The purchaser must withhold 15% of the purchase price in escrow.
- The seller or purchaser must obtain a withholding certificate from the IRS granting permission for the sale to proceed without any withholding, or a reduced withholding, from the purchaser. To request a withholding certificate, a Form 8288-B (Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests), together with related attachments, must be submitted to the IRS before the date of the disposition (Treas. Reg. §§ 1.1445-3 and 1.1445-6). According to the general instruction of Form 8288-B, the IRS will act on an application within 90 days of receipt of all information.
If a Form 8288-B is pending with the IRS on the date of transfer, the withholding need not be paid to the IRS until the 20th day after the IRS issues its decision.
If you are foreigner or a foreign entity thinking about selling real property in the U.S. it is a good idea to plan ahead. As a real estate attorney and title agent, I can guide you through the process. Contact us for initial consultation.