Non-Resident Aliens and 1031 Exchanges
Posted by Andy Gustafson on Thu, May 13, 2010
Foreign persons both individual and business entity can defer federal and state (dependent upon state) capital gains and recaptured depreciation by initiating a 1031 like kind exchange when selling either real and personal property held for investment or in a business. The process works just like a regular 1031 exchange except there are additional filing and reporting requirements.
Foreign Investment in Real Property Tax Act of 1980
The Foreign Investment in Real Property Tax Act (FIRPTA) requires a foreign person, foreign corporation, foreign partnership, foreign trust or nonresident alien engaged in a 1031 exchange to dispose of real property must consider the following:
- Apply for an International Taxpayer Number (ITIN) with the Internal Revenue Service (IRS);
- Apply for a Withholding Certificate with the IRS in advance of the closing;
- Inform the Buyer of the property, a Certificate has been requested;
- Complete and sign an IRS Form W-8.
Whenever a foreign person is a party to an exchange as in the disposition of real property, a withholding tax equal to 10% of the sales price may be withheld. To avoid this withholding, a Withholding Certificate is required. Otherwise the designated transferee or Qualified Intermediary must submit the 10% from the exchange proceeds to the IRS. Not withholding the tax may result in the transferee being held liable for the payment and applicable penalties and interest.
Click here to learn more about the procedures and forms to file.