What You Need to Know About Foreign Investment in Real Property Tax Act Withholding
FIRTPA stands for Foreign Investment in Real Property Tax Act of 1980. FIRTPA has the provision on the disposition of any U.S. real property investment by a foreign person. Real property investments are subject to this act’s income tax withholding. FIRTPA also gives authority to the United States to tax dispositions of real property interests made by a foreign investor.
Terms Related to FIRTPA
The term “disposition” of the Internal Revenue Code means a sale or exchange, redemption, gift, transfers, liquidation, etc.
The transferees are the person buying U.S. real property interests from foreign persons. The transferee can be any person, foreign or local, who gets a U.S. real property by sale, gift, exchange, or any other form of transfer.
Transferees, along with sales agents, and settlement officers will have to withhold 15% of the amount from the disposition (10% for dispositions before February 17).
The transferor is the foreign person disposing of a U. S. real property interests by purchase, exchange, gift or any other transfer. A transfer is a distribution to partners of a partnership, shareholders of a corporation, and beneficiaries of an estate or trust. Any owner of a disregarded entity like LLC is also considered as transferor only of the property and not the entity.
The withholding agent under FIRTPA is the buyer who purchases real estate from the foreign seller or the transferee. The buyer must complete Forms 8288 and 8288-A then submit these forms to the IRS. These forms report the withholding amount of the purchase and are needed when paying the amount to the IRS.
The Foreign Seller ITIN requirement is for foreign sellers without a U.S tax identification number or Social Security. The ITIN is important when paying the IRS or when requesting a refund of your excessive FIRTPA withholding. You can get an ITIN by filing Form W-7.
Questions on FIRTPA
How to report property jointly owned by the U.S. and foreign persons?
The amount realized from a property which is jointly owned by the U.S. and foreign persons is allocated between the transferors. The capital contribution of each transferor is the basis of the allocation.
How to receive a refund of the FIRTPA withholding?
Taxes withheld through Form 1040NR or the U.S. Nonresident Alien Income Tax Return may get a refund. A foreign person is entitled to get the refund if his/her total tax liability is less than the amounts withheld or previously paid.
The foreign person’s U.S. tax liability will get credit for the amounts withheld. The withheld amount may be greater than the actual tax liability due on the disposition of the property. Section IRC 1445 entitles a foreign person to a refund of taxes withheld.
If the request for refund is timely, the IRS would check Form 1040NR for accuracy. The reported gain or loss on the disposition of the real property and the withheld taxes obliged on the transaction must be correct.