FOREIGN INVESTMENT IN REAL Property Tax
The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.
A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferee) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 10 percent of the amount realized on the disposition (special rules for foreign corporations).
In most cases, the transferee/buyer is the withholding agent. If you are the transferee/ buyer you must find out if the transferor is a foreign person. If a transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.
IRS GENERAL RULES
The IRS requires the purchaser to withhold 10% of the sales price for the IRS; 3.3% of the sales price for California State taxes. The purchaser is personally liable for a failure to withhold.
Note 1: The IRS may take between 8 to 12 weeks to return an approved withholding certificate. Submit with Form 8288-B well in advance of the sale’s closing. MUST GET TAXPAYER ID NUMBER FOR FED & CAL
Note 2: Submit a Form W-7 (request for taxpayer ID number) with Form 8288-B. IRS is unlikely to issue a Taxpayer ID Number before submitting Form 8288-B or completing Form 1040NR.
Note 3: The purchaser need only pay to the IRS the revised withholding amount by the 20th day after the Service mails a copy of the withholding certificate, whether approved or denied.
And hey! Always contact your certified public accountant or financial adviser before making tax decisions.