FIRPTA Certificate

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) changed the landscape of the way non-resident individuals or corporations in the United States conduct the sales of real property located in the United States. FIRPTA stipulates that any United States real property sold by a non-resident is subject to a 10 percent withholding by the IRS to be used towards the payment of the capital gains tax. This is for the most part a hard-and-fast rule, but the seller can file for a FIRPTA certificate to either reduce or negate altogether the 10 percent withholding upon the sale.

The FIRPTA withholding requirement is not recognized when a United States real property interest is disposed by a non-resident alien individual or foreign corporation and simultaneously exchanged for a United States real property interest. Once the subsequent replacement property is sold and closed following a holding period, the FIRPTA withholding requirement would apply. In a simultaneous 1031 exchange, no later than the 20th day after the date of the exchange, a copy of the non-resident alien entity non-recognition notice is sent to the appropriate Internal Revenue Service.

IRS Form 8288B

The non-resident seller would submit to the IRS Form 8288B prior to the sale of the property in hopes that the IRS would issue a FIRPTA certificate (withholding certificate). The Form 8288B serves as an application with the seller providing certain requested information detailing why a FIRPTA certificate should be issued for that particular transaction. The seller would be responsible for any withholding not satisfied from the original purchase of the property and the tax from the current sale. It typically takes around three to five months for the IRS to complete the process and make a final decision. Because of the lengthy wait time, the decision by the IRS is usually not made by the time the sale is complete. At closing, the 10 percent would still be withheld from the sales price, but instead of sending it to the IRS, the 10 percent would be retained by an escrow company awaiting the final ruling. Should the withholding certificate be issued by the IRS to the foreign seller, the escrow agent would send the appropriate portion as governed by and to the IRS, and the remainder would be sent to the foreign seller.

Example: Phil is not a resident of the United States and is nearing a sale of real property for $500,000. Phil submits a Form 8288B to the IRS on or before the date of the sale. At the closing, the FIRPTA standard 10 percent ($50,000) would be withheld from the sales proceeds and would be held with an escrow agent. Four months after the closing, Phil receives a withholding certificate. At this point, the escrow agent would send the IRS the portion of the 10 percent applicable to the capital gains tax for the sale. The remainder would be sent back to the seller. The withholding must be sent to the IRS no later than the 20th day following the date the IRS mailed the certificate.

1031 Exchange and FIRPTA Withholding Certificate

When a non-resident initiates a 1031 exchange on the sale of the U.S. property interests, the Qualified Intermediary (QI) may act as the party submitting the 8288 forms given the QI holds the taxpayer’s sales proceeds. To comply with the non-recognition notice and Buyer’s signature request on related documents, I have not had an issue with the IRS if the withholding package is submitted after the sale but within a timely manner. A response is typically received after the exchange has been completed. Given all net equity and relinquished property debt is replaced in the new properties, the withholding certificate is approved. If any cash or debt is not replaced, ten percent must be withheld and submitted to the IRS. Otherwise, the QI is responsible for paying the IRS.

In complicated deferred improvement exchanges, the IRS will want to see the contractor invoices to verify that the funds were used appropriately. I found the IRS agents understanding and helpful.

Should you have questions regarding FIRPTA and withholding certificates, click on the button below or call our office.