FIRPTA is a U.S. tax law that can be quite a headache for foreign investors and companies, because it is often misunderstood. Unfortunately, improperly addressing FIRPTA issues can leave you open to serious liabilities and prosecution by the IRS (Read here about the IRS FIRPTA Guidelines). As a FIRPTA lawyer, I can help you decipher whether you are subject to FIRPTA and help you mitigate its impact.
Key Terms Unique to FIRPTA
Definitions of key terms in FIRPTA are mostly unique to this act. The following are some key terms you must understand in order to understand how and when FIRPTA applies:
- U.S. Real Property Interest. This includes actual property, such as land, personal property items, undeveloped natural resources and improvements on property. It also includes assets less commonly thought of as property, including shares, interest in a corporation, interest in a partnership and any other ownership rights to a U.S. business or real estate.
- Foreign Person. A foreign person under FIRPTA is defined as a nonresident alien individual, a foreign corporation, a foreign partnership, a foreign trust or foreign estate. This does not apply to foreign persons legally residing in the United States.
- Disposition. Disposal for profit of a U.S. real property interest by sale, exchange, gift or any other transfer. This includes distributions to shareholders of a corporation, partners of a partnership and beneficiaries of a trust or estate.
If you sell a real property interest as a foreign person in the U.S., it is almost impossible to get around FIRPTA. There are, however, actions you can take to mitigate the impact of FIRPTA on your capital gains. You can apply to the IRS to reduce the amount withheld to a lower percentage of the estimated taxes due, if applicable. You can also purchase and dispose assets using a domestic corporation, although you will still be required to file disclosures of the makeup of the company as foreign.
It’s important to note that these tactics only change the taxation process; they do not eliminate your tax burden altogether. If you want to know which options may best mitigate the impact of FIRPTA for you, discuss your unique situation with an experienced FIRPTA attorney and your CPA.
Please be sure to contact a qualified tax professional to assist with your FIRPTA withholding filings. My law firm has the privilege of working with some of the best CPA’s, specializing in FIRPTA in South Florida.
Please note, regardless of whether the nonresident seller owes tax or does not owe tax, they are still required to obtain a U.S. tax identification number (ITIN) and file a nonresident income tax return to report the sale. If the seller does not have a U.S. tax identification number, they must apply for one at the time of filing Form 8288-B. If the seller is an individual who does not qualify for a Social Security Number, they will need to apply for an Individual Tax Identification Number (ITIN) by attaching Form W-7, Application for IRS Individual Taxpayer Identification Number, to the 8288-B. If the seller already has a valid ITIN, the 8288-B will be filed at the address in Ogden, Utah provided in the 8288-B instructions.
Form 8288 and 8288-A
When real estate is purchased from a non-US person, the buyer is required to file Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, to report and pay the FIRPTA tax withholding. Form 8288 is due within 20 days of the sale. However, if a withholding certificate application is still pending at the date of sale, Form 8288 is not due until 20 days after the IRS issues the certificate or notice of denial. Tax should be withheld at the time of sale, but does not need to be sent with Form 8288 until that time.
Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, is a form that shows the FIRPTA withholding allocated to each seller. There are three copies of Form 8288-A: Copy A, B, and C. Copy C is retained in the buyer’s files. Copies A and B are sent to the IRS with Form 8288. The IRS will stamp Copy B and send it to the seller. It is very important for the seller to keep this stamped copy as it will need to be attached to their tax return so they can receive credit for the withholding.
Information required when filing for an ITIN and a withholding certificate
The following items must be submitted by the seller to the IRS on or before the date of sale if the seller wants to obtain a timely withholding certificate. Please note that many local title companies will NOT wait to hear back from the IRS on the withholding certificate approval due to the risks of late submission of the withholding amount. However, to obtain a valid withholding certificate and an ITIN, the following items should be provided in the submission package:
- Form 8288
- Forms 8288-A, Copies B and C
- Form 8288-B, with original signature of the seller
- Form(s) W-7, with original signature of the seller(s) (if an ITIN is needed)
- Passports certified by the original issuer for each seller (if an ITIN is needed)
- The HUD closing statement on the original purchase of the property by the seller
- The HUD closing statement on the sale of the property by the seller
- The signed original contract of sale on the current sale of the property
- A spreadsheet calculating the net gain on the sale
- Receipts to prove improvements listed on the net gain calculation
The IRS should still issue a withholding certificate even though the title company has submitted the full required withholding amount. At that point, the seller or their CPA may provide a copy of the certificate and the stamped copy B of Form 8288-A to the IRS and an early refund of excess withholding tax may be obtained. Even if this occurs, the seller MUST file a U.S. federal and state income tax return to report the sale of the real property for the year of the sale.
Please be sure to contact a qualified tax professional to assist with your FIRPTA withholding filings. This information is general in nature and should not be relied upon.