FIRPTA Withholding Under IRC 1445: Answers to the Questions Buyers and Sellers Ask Most
FIRPTA withholding raises a lot of specific, technical questions for buyers, sellers, and closing agents navigating a transaction involving a foreign person. Below are answers to some of the most common questions that come up under IRC 1445, covering joint ownership, timing, exclusions, residency requirements, liability, community property, and the ITIN and withholding certificate process.
If a U.S. real property interest (USRPI) is jointly owned by spouses, one foreign person and one U.S. person, and the USRPI is disposed of, may the spouse who is a U.S. person report 100% of the amount realized from the disposition and the spouse who is a foreign person report 0% of the amount realized to avoid the withholding required under Internal Revenue Code Section (IRC) 1445?
No, the amount realized cannot be allocated entirely to one transferor when two or more transferors own the USRPI.
If one or more foreign persons and one or more U.S. persons jointly dispose a USRPI, the amount subject to withholding under IRC 1445 is determined in the following manner: the amount realized is allocated among the transferors based on their capital contributions to the USRPI, and for this purpose a husband and wife are treated as having contributed 50% each. The transferee/buyer withholds on the total amount allocated to the foreign transferor(s). The amount of credit for the withholding to be allocated to each foreign transferor is allocated in accordance with the foreign transferors' agreement. The foreign transferors must request that the withholding be credited as agreed upon by the 10th day after the date of transfer. If no agreement is reached, the transferee will credit the withholding by evenly dividing it among the foreign transferors.
In which year does a transferor/seller report the disposition of a U.S. real property interest (USRPI) on their income tax return if the date of transfer shown on the Form 8288-A is the subsequent year to the year the USRPI was actually transferred due to a withholding certificate request being filed in the year of the actual disposition but the determination by the IRS is not made until the subsequent year?
When a transferor/seller disposes of a USRPI, it should be reported, for income tax purposes, in the year the disposition occurred. The date of disposition on Copy B of Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, may be different from the actual date of disposition in situations where a withholding certificate request is made. In these situations, the IRS is required to change the date of disposition on the form to the date of the withholding certificate request approval or denial letter sent to the requester.
For example, a transferor/seller sends the IRS a request for a withholding certificate on Dec. 10, 2018, for a disposition of a USRPI that is to take place on Dec. 15, 2018. The IRS reviews the request and issues the withholding certificate denial letter on March 10, 2019. Although the actual date of the disposition is Dec. 15, 2018, the date of disposition on Copy B of Form 8288-A would be March 10, 2019, the date of the denial letter. However, the transferor/seller is required to report the disposition on their 2018 income tax return, since the actual date of the disposition is Dec. 15, 2018.
Does the exclusion of gain from the sale of a personal residence, under IRC 121, apply to nonresident aliens (NRAs)?
The exclusion of gain for the sale of a personal residence under IRC 121 may apply to NRAs when they sell their U.S. personal residence. Because NRAs cannot file joint returns unless they are married to U.S. persons, NRAs would need to take their own share of the principal residence exclusion amount on separate tax returns. Consequently, the maximum amount of excludable gain for NRAs who file Form 1040NR, U.S. Nonresident Alien Income Tax Return, is $250,000. For the exclusion to apply, NRAs would have to meet the eligibility test required for the exclusion, which can be reviewed in Publication 523, Selling Your Home, as well as Topic No. 701, Sale of Your Home.
If an NRA qualifies to claim the IRC 121 exclusion, the statutory withholding under IRC 1445 on the amount realized from the sale could exceed the maximum tax liability on the sale. Therefore, an NRA may request a withholding certificate from the IRS to provide to the buyer. The withholding certificate would allow the buyer, through escrow or the closing agent, to withhold tax at an approved reduced rate.
How is it determined whether a U.S. Real Property Interest (USRPI) is acquired by the transferee/buyer to be used as a "residence" in order to meet the reduced withholding under IRC 1445 when the amount realized is between $300,000 and $1 million or the exception from withholding when the amount realized is $300,000 or less?
In order for a USRPI to be considered a "residence" of the transferee/buyer for the reduced or eliminated withholding, one or more transferees/buyers must have definite plans to reside at the USRPI for at least 50 percent of the number of days that the property is used by any person during each of the first two 12-month periods following the date of transfer. The number of days the property is vacant is not counted toward the number of days the property is used by any person. A transferee/buyer is considered to reside at a property on any day a member of the transferee/buyer's family, including brothers and sisters (whether whole or half-blood), spouse, ancestors, and lineal descendants, resides at the property.
For example, a transferee/buyer (BUYER) purchases, in her name only, a USRPI for $299,000 and states she is going to reside in the USRPI. BUYER is not married but has an adult daughter. The property is purchased on Jan. 1, 2017. BUYER and her daughter live in the USRPI together through the end of April 2017. On May 1, 2017, BUYER takes a temporary position overseas where she lives for 8 months while her adult daughter lives in the USRPI. BUYER returns on Jan. 1, 2018, and lives in the USRPI with her daughter until May 31, 2018, when BUYER takes another temporary overseas job until Feb. 22, 2019. Although BUYER only resided at the USRPI for approximately 33% of the days during 2017 and 42% of the days during 2018, her daughter resided there 100% of the days during both years. Therefore, the USRPI is considered a "residence" of BUYER for 2017 and 2018.
If a transferee/buyer purchases a U.S. Real Property Interest (USRPI) from a foreign person for $300,000 or less and plans to use the USRPI as their personal residence for the next two years but does not fulfill this requirement over the two years, what actions are required of the transferee/buyer with respect to withholding?
If a transferee/buyer fails to withhold from the amount realized in reliance upon the exception that the transferee/buyer planned on using the USRPI as a personal residence for the next two years, but did not in fact reside at the USRPI for the minimum required time, the transferee/buyer will be liable for the failure to withhold, if the transferor/seller was a foreign person and did not pay the full U.S. tax due on any gain recognized upon the transfer. However, if the transferee/buyer establishes that the failure to reside the minimum number of days was caused by a change in circumstances that could not reasonably have been anticipated at the time of the transfer, the transferee/buyer will not be liable for the failure to withhold.
How may a transferor/seller ensure a transferee/buyer or closing agent will not withhold under IRC 1445 on dispositions of U.S. Real Property Interests (USRPI) when the dispositions are exempt from withholding because the amount realized is $300,000 or less and the USRPI will be used as a personal residence by the transferee/buyer?
The transferor/seller can help ensure there is no withholding in this situation by making sure all parties are well informed. This includes making sure the transferee/buyer and the closing agent are aware of the exception to withholding, and making sure the transferee/buyer informs the closing agent that they plan on living in the USRPI as a personal residence. The instructions for Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, provide information on this exception from withholding.
When would a transferee/buyer complete a Form 8288-B to request a withholding certificate for a transferor/seller?
A transferee/buyer or the transferor/seller (or an authorized person) may complete Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, and file it to request a withholding certificate for reduced or no withholding under IRC 1445. A transferee/buyer may file the Form 8288-B when the transferee/buyer is more familiar with the administrative procedures related to withholding under IRC 1445, or when the transferee/buyer is aware that a reduced rate of withholding or no withholding is applicable, and filing the Form 8288-B and getting an approved withholding certificate would reduce their administrative burden of withholding, remitting tax, and completing and filing Form 8288 and Form 8288-A.
If a foreign transferor/seller has a current address outside the U.S. and applies for a withholding certificate, how can the transferor/seller ensure the withholding certificate is provided to the escrow agent/closing company timely by the Internal Revenue Service (IRS)?
A foreign transferor/seller who is residing overseas at the time they request a withholding certificate may put the escrow or closing company's information in Box 5 of Form 8288-B to ensure that the closing agent timely receives IRS correspondence with respect to a determination made on a withholding certificate request.
May a foreign person request and receive an individual taxpayer identification number (ITIN) prior to entering into a contract to dispose of a U.S Real Property Interest (USRPI) if they have no other valid reason to obtain an ITIN?
No, a foreign person who does not have a valid reason to obtain an ITIN cannot request an ITIN prior to entering a contract to dispose of a USRPI. A foreign person who does not have and is not eligible to receive a social security number can only apply for and receive an ITIN using Form W-7, Application for IRS Individual Taxpayer Identification Number, in certain situations, including but not limited to a requirement to file a U.S. federal tax return, claim a reduced withholding under an applicable income tax treaty, or be claimed as a dependent on another individual's income tax return.
Therefore, absent any other valid reason to obtain an ITIN, the IRS will deny an application submitted prior to entering into a contract to dispose of a USRPI. As soon as there is a legally binding contract for the sale of a USRPI, the foreign person/seller is eligible to request an ITIN by filing Form W-7 under Exception #4, Third-Party Withholding – Disposition by a Foreign Person of a U.S. Real Property Interest.
How long does the Internal Revenue Service (IRS) take to act on a withholding certificate application if the transferor/seller does not have a Taxpayer Identification Number (TIN) and applies for an Individual Tax Identification Number (ITIN) at the same time as the withholding certificate application?
The IRS will normally act on a withholding certificate application within 90 days of receipt of all information necessary to make a proper determination. If a transferee/buyer or transferor/seller does not have a TIN and an ITIN is requested at the same time as the withholding certificate request, the ITIN request is processed within 10 days of receipt. The completed Form W-7 needs to include the completed Form 8288-B, with the entire package forwarded to the IRS at the address given in the Form W-7 instructions.
Is FIRPTA withholding required in situations where U.S. real property is disposed of and the real property is located in a community property state and titled only in the name of a U.S. person even though that U.S. person is married to a nonresident alien (NRA)?
Whether FIRPTA withholding is required in this situation depends on the facts and circumstances. Generally, FIRPTA withholding is required when an NRA disposes of a USRPI. Under community property law, title to property generally carries relatively little weight in determining whether property is separate or community property. Since the community property system has been adopted in several U.S. states and these community property laws are not all the same across states, determining whether real estate is separate property or community property in a given community property state needs to be based on the facts and circumstances and that state's specific community property laws. See Publication 555, Community Property, for additional information.
Is FIRPTA withholding required in the situation where a U.S. real property interest (USRPI) owned by at least one nonresident alien and one or more others is disposed of and the transferee/buyer intends to use the USRPI as a residence and the total amount realized on the disposition of the USRPI is greater than $300,000 but no one transferor's/seller's allocable portion of the total amount realized is greater than $300,000?
Yes, FIRPTA withholding would still be required. An NRA would not be exempt from FIRPTA withholding in this situation, even though the transferee intends to use the USRPI as a residence and each transferor's allocable portion of the amount realized is $300,000 or less. The Code's exemption for "Residence where Amount Realized does not exceed $300,000" applies based on the total amount realized on the disposition, which is defined as the sum of the total cash paid by the transferee, the total fair market value of property transferred by the transferee, and the total amount of debt or liability assumed by the transferee, not each transferor's individual allocable portion. Therefore, if the total amount realized on the disposition is greater than $300,000, this specific exemption does not apply, regardless of how the proceeds are split among multiple sellers.
The Bottom Line
FIRPTA withholding under IRC 1445 is full of details that can trip up buyers, sellers, and closing agents alike. Jointly owned property gets allocated based on capital contribution, not on however the parties would prefer to split it at closing. A sale gets reported in the year it actually happened, regardless of what date ends up printed on Form 8288-A. Nonresident aliens can still claim the Section 121 exclusion, but they need a withholding certificate to make sure the amount withheld actually reflects that exclusion. Residency intent is measured over a two year window and can be satisfied through a qualifying family member, not just the buyer personally. And relying on the $300,000 residence exception without following through on that residency creates real liability exposure for the buyer, unless the shortfall was caused by something genuinely unforeseeable.
Handling a Transaction With a Foreign Buyer or Seller? Get the Withholding Right From the Start
At Shahbaz & Associates CPAs, we help buyers, sellers, and closing agents work through FIRPTA withholding requirements under IRC 1445, from Form 8288-B withholding certificate applications and ITIN requests tied to a USRPI disposition, to joint ownership allocation questions and IRC 121 exclusion coordination for nonresident aliens.
Contact Shahbaz & Associates CPAs before your next U.S. real estate transaction involving a foreign buyer or seller to make sure the withholding, documentation, and reporting are all handled correctly from the start.