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FIRPTA: Foreign Investment in Real Property Tax Act

March 2024

WITHHOLDING OF TAX ON DISPOSITIONS OF UNITED STATES REAL PROPERTY INTERESTS

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 (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (10% for dispositions before February 17, 2016) 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 the 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.

U.S. REAL PROPERTY INTEREST

A U.S. real property interest is an interest, other than as a creditor, 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). It also means 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 (applicable periods).

An interest in a corporation is not a U.S. real property interest if:

  1. Such corporation did not hold any U.S. real property interests on the date of disposition,
  2. All the U. S. real property interests held by such corporation at any time during the shorter of the applicable periods were disposed of in transactions in which the full amount of any gain was recognized, and
  3. For dispositions after December 17, 2015, such corporation and any predecessor of such corporation was not a RIC or a REIT during the shorter of the applicable periods during which the interest was held.

RATES OF WITHHOLDING

The transferee must deduct and withhold a tax on the total amount realized by the foreign person on the disposition. The rate of withholding generally is 15% (10% for dispositions before February 17, 2016).

The amount realized is the sum of:

  • The cash paid, or to be paid (principal only);
  • The fair market value of other property transferred, or to be transferred; and
  • The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.

If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain it recognizes on the distribution to its shareholders.

A domestic corporation must withhold tax on the fair market value of the property distributed to a foreign shareholder if:

  • The shareholder’s interest in the corporation is a U.S. real property interest, and
  • The property distributed is either in redemption of stock or in liquidation of the corporation.

For distributions before February 17, 2016, the corporation generally must withhold 10% of the amount realized by a foreign person. For distributions after February 16, 2016, the rate increases to 15%.

For additional information on the withholding rules that apply to corporations, trusts, estates, and REITs, refer to section 1445 of the Internal Revenue Code and the related regulations. For additional information on the withholding rules that apply to partnerships, refer to discussion under partnership withholding. Also, consult the “U.S. Real Property Interest” section in IRS Publication 515.

FIRPTA documents are processed at:

Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409.

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit theTax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

EXCEPTIONS FROM FIRPTA WITHHOLDING

Generally you do not have to withhold in the following situations; however, notification requirements must be met:

  1. You (the transferee) acquire the property for use as a residence and the amount realized (sales price) is not more than $300,000. You or a member of your family must
  2.  have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods
  3. following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant. For this exception, the
  4. transferee must be an individual.
  5. The property disposed of is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market.
  6. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded corporations.
  7. The disposition is of an interest in a domestic corporation and that corporation furnishes you a certification stating, under penalties of perjury, that the interest is not a
  8.  U.S. real property interest. In most cases, the corporation can make this certification only if either of the following is true.
  9. During the previous 5 years (or, if shorter, the period the interest was held by its present owner), the corporation was not a USRPHC.
  10. As of the date of disposition, the interest in the corporation is not a U.S. real property interest by reason of section 897(c)(1)(B) of the Code. The certification
  11. must be dated not more than 30 days before the date of transfer.
  12. The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor’s name, U.S. taxpayer
  13.  identification number, and home address (or office address, in the case of an entity).
  14. The transferor can give the certification to a qualified substitute. The qualified substitute gives you a statement, under penalties of perjury, that the certification is in the
  15. possession of the qualified substitute. For this purpose, a qualified substitute is (a) the person (including any attorney or title company) responsible for closing the
  16.  transaction, other than the transferor’s agent, and (b) the transferee’s agent.
  17. You receive a withholding certificate from the Internal Revenue Service that excuses withholding. See Withholding Certificates , later.
  18. The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in
  19. the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the
  20. Ogden Service Center, P.O. Box 409101, Ogden, UT 84409.
  21. The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
  22. The property is acquired by the United States, a U.S. state or possession, a political subdivision, or the District of Columbia.
  23. The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale,
  24. exchange, or exercise of that option.
  25. The disposition is of an interest in a publicly traded partnership or trust. However, this exception does not apply to certain dispositions of substantial
  26.  amounts of non-publicly traded interests in publicly traded partnerships or trusts.

CERTIFICATIONS

THE CERTIFICATIONS IN ITEMS (3) AND (4) ARE NOT EFFECTIVE IF YOU (OR THE QUALIFIED SUBSTITUTE) HAVE ACTUAL KNOWLEDGE, OR

receive a notice from an agent (or substitute), that they are false. This also applies to the qualified substitute’s statement under item (4).

If you (or the substitute) are required by regulations to furnish a copy of the certification (or statement) to the IRS and you (or the substitute) fail to do so in the time and manner prescribed, the certification (or statement) is not effective.

LIABILITY OF AGENT OR QUALIFIED SUBSTITUTE

If you (or the substitute) receive a certification discussed in item (3) or (4) or a statement in item (4), and the agent, or substitute, has actual knowledge that the certification (or statement) is false, or in the case of (3), that the corporation is a foreign corporation, the agent (or substitute) must notify you, or the agent (or substitute) will be held liable for the tax. The agent’s (or substitute’s) liability is limited to the compensation the agent (or substitute) gets from the transaction.

An agent is any person who represents the transferor or transferee in any negotiation with another person (or another person’s agent) relating to the transaction, or in settling the transaction. A person is not treated as an agent if the person only performs one or more of the following acts related to the transaction:

  • Receipt and disbursement of any part of the consideration,
  • Recording of any document,
  • Typing, copying, and other clerical tasks,
  • Obtaining title Insurance reports and reports concerning the condition of the property, or
  • Transmitting documents between the parties.

A Withholding Agent is personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest.  A Withholding Agent is any person having the control, receipt, custody, disposal or payment of income that is subject to withholding.  Generally, the person who pays an amount to the foreign person subject to withholding must do FIRPTA withholding.

REFERENCES/RELATED TOPICS

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

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