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Nonresident Alien 1031 Exchange and Foreign Investment in Real Property Tax Act (FIRPTA)

1031 Exchange Non Resident Alien FIRPTACompliance with the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) is required when a nonresident alien individual or foreign partnership, trust, estate or corporation disposes of U.S. real property. The purchase of a U.S. real property interest from a foreign person or foreign corporation is subject to a withholding tax in an amount equal to 10% of the sales price. Nonresident alien individual or entity party to a 1031 exchange by selling real property is subject to capital gains tax and is suggested to:

  • Apply (individuals file Internal Revenue Service (IRS) Form W-7 and entities IRS Form SS-4) to the IRS for an International Taxpayer Identification Number (ITIN) recognizing it can take between six weeks to several months. Do it now.

  • Apply for a Withholding Certificate by completing Form 8288-B in advance of the U.S. property closing. See instructions to Form 8288.

  • Inform the transferee (buyer) of the property that a Withholding Certificate has been requested from the IRS.

  • Be prepared to complete and sign IRS Form W-8. There are three versions of the form W-8ECI, W-8BEN or W-8IMY, each is dependent upon the characteristics of the foreign entity or person.

Under Section 1445, not withholding the tax may result in the transferee being held liable for the tax payment, applicable penalties and interest. It is suggested the transferee file IRS Forms 8288 and 8288-A to the IRS prior to the relinquished property closing. The amount withheld need not be paid to the IRS until the 20th day following the Service's final determination of the application for the withholding certificate.  

FIRPTA regulations treat the withholding requirement differently if involved in either a simultaneous exchange or a forward exchange. In a simultaneous exchange, the transferee is not required to withhold if:     

(1) the transferor provides a written notice to the transferee that the transferor is not required to recognize any gain or loss on the transfer is required due to I.R.C. §1031; and 

(2) on the 20th day after the date of the exchange, the transferee provides a copy of the transferor's notice to the IRS.

The transferee can rely on the notice if the foreign person does not receive cash or mortgage boot in a simultaneous exchange.

In a forward exchange, the transferee may be required to pay the withholding tax but must file Form 8288, "U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests." If an application for a withholding certificate is submitted prior to or on the date of the closing, the withholding may be delayed. The amount withheld need not be reported and paid to the Service until the 20th day following the Service's mailed response approving or denying a withholding certificate to the transferee. To learn more, see Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities and seek the counsel of your accountant.  See another article on FIRPTA.

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