The sale, exchange or transfer of a U.S. real property interest (“USPRI”) by a foreign person may be subject to tax withholding under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). USPRIs include not only direct equity interests in U.S. real estate, but also holdings through pass-through entities (partnerships, estate, and trusts) and stock in domestic corporations that hold more than half their assets in the form of USPRIs. The IRS has strict time requirements for reporting transactions and remitting the taxes withheld.
The buyer or transferee of a U.S. real property interest is usually the party responsible for meeting the withholding requirements when the seller or transferor is a foreign person. If the transferor is a foreign person, the transferee must generally withhold 10% of the sales price or amount realized in the transaction, regardless of the actual gain or loss to the transferor.
If the buyer fails to withhold the required tax from the seller, then the IRS can collect the tax from the buyer. A buyer that fails to deduct and withhold tax will also be liable for interest from the date when the tax was due to the date the buyer finally pays the tax.
Under some circumstances, withholding may be reduced or eliminated. When an exemption from withholding is applicable, an application for a withholding certificate is necessary to qualify for the exemption. If the application for a withholding certificate or reduced withholding is not filed on time or completed with all the required elements, it may be denied. In addition, the transferor needs to notify the transferee when there are applicable exemptions.
How Planning Ahead Can Help
Determining whether a transaction is subject to FIRPTA is only the beginning of what must be done prior to the sale of U.S. real property. Once this determination is made, taxpayers need to comply with the law and may benefit from alternatives to lower the withholding or eliminate the requirement completely. Whether you are the transferee or the transferor of a U.S. real property interest, navigating the requirements of FIRPTA is essential.
Boulay can help with the following:
- Examining a transaction to determine whether FIRPTA applies
- Preparing withholding documents and calculating the required withholding amount
- Determining whether a reduction or an exemption to withholding for a specific transaction is applicable
- Applying for reduced withholding and/or withholding exemption certificates
To learn more about FIRPTA Withholding Rules, contact Eleonora Khaskin at 952.841.3093 or firstname.lastname@example.org.