
Jesse M. Dimitro
Senior Associate
212-390-1641 jdimitro@sh-law.comSenior Associate
212-390-1641 jdimitro@sh-law.comIf you purchase real property from a foreign person or entity, you may be required to withhold taxes from your payment to the seller under the Foreign Investment in Real Property Tax Act (FIRPTA). The federal tax law is designed to ensure that foreign sellers pay any applicable capital gains tax on profits realized from the transaction. FIRPTA compliance is equally important for buyers because if you fail to comply, you could be held liable for a portion of the foreign seller’s taxes.
FIRPTA requires that purchasers of U.S. real property interests from foreign persons withhold 15% of the purchase price and send it to the Internal Revenue Service (IRS). When the foreign seller files a U.S. tax return, the amount withheld is credited towards any tax due.
FIRPTA withholding only applies when the seller is a “foreign person,” which generally includes nonresident aliens; foreign corporations that haven’t elected to be treated as a domestic corporation; and foreign partnerships, trusts, and estates. If U.S. real property is jointly owned and sold by a foreign person and a U.S. person, buyers are only required to withhold FIRPTA taxes on the foreign person’s share of the purchase price.
Only U.S. real property interests are subject to FIRPTA withholding. A U.S. real property interest is an interest in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of real property (such as farming machinery). The definition also covers any interest, other than as a creditor, in any domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or the 5-year period ending on the date of disposition.
As with many tax laws, application of FIRPTA’s withholding requirements is not always straightforward. For instance, FIRPTA withholding is not required in the following circumstances:
A seller’s foreign status may not always be obvious, particularly when trusts, LLCs, and other entities are involved in the transaction. To avoid unintended liability, due diligence is often necessary to determine whether FIRPTA compliance is required.
Generally, buyers must report FIRPTA withholding to the IRS within 20 days after the sale. Buyers who fail to comply with the FIRPTA withholding requirements may be held liable for the tax owed, along with penalties and interest.
In most cases, the buyer must complete Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. Additional compliance is required by the foreign seller to report the sale either on Form 1040NR or 1120-F if a foreign corporation.
Because mistakes in FIRPTA compliance can be quite costly, we strongly encourage working with experienced professionals in all real estate transactions involving a foreign seller.
At Scarinci Hollenbeck, the attorneys of our Commercial Real Estate Group and Tax, Trusts & Estates Group possess the in-depth knowledge and experience required to advise both sellers and buyers regarding their tax obligations under FIRPTA. When the statute applies, we can expertly guide clients through the real estate transaction, while also working to reduce or eliminate the withholding requirements through proper tax planning.
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