FIRPTA Certificate: 1031 Exchange Implications
The Foreign Investment Real Property Tax Act (FIRPTA) of 1980 was implemented to capture capital gains taxes from non resident aliens selling real property in the United States. If a foreign person or nonresident alien is a party to a 1031 exchange, FIRPTA reporting and withholding requirements must be examined. A foreign person includes a foreign corporation, foreign partnership, foreign trust or foreign estate, in addition to domestic partnerships, trusts, estates to foreign persons who are partners or beneficiaries to such partnerships, trusts or estates.
The withholding tax of ten percent of the sales price is required by any person acquiring United States real property interest from a foreign person, nonresident alien or foreign corporation. The withholding applies to those sales of United States real property interests by a foreign entity only if exchanged for United States real property and subject to federal taxation.
Failure to deduct and withhold tax as required under Section 1445 may result in the transferee being held liable for the payment of the tax and any applicable penalties and interest per Regulation §1.4445-3. Withholding may be reduced or eliminated if a withholding certificate is obtained by either the transferor or transferee per Regulation §1.1445-3 and Form 8288. Time periods for applying for such certificate on Form 8288-B, for withholding funds, and for action by the Service on such applications are provided in Regulation §1.1445-1(c)(2) and Regulation §1.1445-3(a).
No withholding is required if an individual transferee is acquiring the United States real property for use as the transferee’s residence and the amount realized on the transaction is $300,000 or less per Internal Revenue Code §144(b)(5) and Regulation §1.1445-2(d)(1).
A certificate can be prepared by a CPA or closing agent and forwarded to the Director, Philadelphia Service Center. Often the Qualified Intermediary will be asked to be the transferee and withhold the 10 percent, given their oversight of the exchange proceeds. If an application for a withholding certificate is mailed before or on the date of disposition, the withholding may be delayed. However, the transferee must still withhold 10 percent though it need not be reported and paid to the Internal Revenue Service until the 20th day following the Service’s final determination with respect to the application.
Failure to report and forward withholding tax by the 20th day following the date of transfer subjects the transferee to interest and penalties. Review and understand the requirements found on Form 8288.
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