International Tax Services

What happens when foreign persons sell US real estate.

In 1980 President Reagan signed the Foreign Investment in Real Property Tax Act. Better known as FIRPTA this piece of legislation provides for the taxation of US real estate when it is held by a non U.S. resident. We are often called upon to interpret FIRPTA provisions and help parties comply with the law when buying or selling property. What follows is a compilation of the most frequently asked questions we run into in this area.

1. Who is a US resident for tax purposes? A US tax resident is any US citizen, anyone who comes to the US with a green card, or anyone who passes the 183 day test. The 183 day test weights your presence in the US for the last three years and works as follows:

   Days present in US in 2006	100 x 1 = 100
   ...in 2005	210 x 1/3 = 70
   ...in 2004	60 x 1/6 = 10
   Total	180

   In this example the test was not met for the 2006 tax year since the total did not equal or exceed 183. Note, however, that the total would have been exceeded in 2005 on the basis of the number of days present in that year alone.

If you are a US resident for tax purposes you will be taxed on your worldwide income. Non-residents are taxed only on their US source income.

2. Why were 10% of my sales proceeds withheld at closing? FIRPTA requires the buyer of a foreign person’s property to withhold 10% of the sales price and send it to IRS as a sort of estimated tax payment.

3. How can I keep 10% from being withheld? There are several exceptions to FIRPTA withholding but these three are most common.
   
   • You may certify that you are a non-foreign person (a US resident for tax purposes) and pay tax on your worldwide income.
     
   • You may apply for a withholding certificate before closing.
     
   • If the sale is for less than $300,000 you may have the buyer sign an affidavit stating that the property will be used as her personal residence.

4. What is a withholding certificate and how do I get one? A withholding certificate is usually applied for on IRS form 8288B. This is a detailed accounting of the contracted sales price of the property and the property’s basis. Using this form IRS calculates the gain on sale, the estimated amount of tax due, and the final amount required to be withheld. You will still have 10% of the proceeds placed in escrow at closing, but once IRS issues the withholding certificate the difference between the amount withheld and the IRS determined amount can be distributed to you.

5. How long does it take to get a withholding certificate? IRS has 90 days from the date all information is received to act on your request. However, it is often necessary for foreign individuals to obtain taxpayer ID numbers(TIN’s) first. The application for a TIN is sent in with the withholding certificate application. In our experience obtaining TIN’s often holds up the process significantly. If possible it is best to obtain TIN’s before you need them for a property sale.

6. How do I get a TIN? You can apply for a TIN when you must file a tax return in the US. You may also be able to get a TIN if you open an interest bearing account in a US financial institution. There are other scenarios under which obtaining a TIN is advisable, but it is best to consult your CPA to make that determination.

7. Will FIRPTA’s 10% withholding requirement affect a 1031 exchange? YES, you should always consult with your legal counsel and CPA before embarking on a 1031 exchange in which FIRPTA withholding will be required. In short, the 10% withholding may be treated as boot to the seller upon sale of the original property and will be taxed just like any other non-like kind consideration received.

8. How do I keep my property manager from withholding 30% of my rental proceeds? FIRPTA requires withholding on gross rents of foreign owned US real estate. You can stop the 30% withholding by filing form W8-ECI. This tells the IRS that you are electing to treat your rental as a US trade or business and that you will be filing tax returns to report the activity and pay the tax due.

9. Does FIRPTA affect gifts of US real estate by foreigners? YES, this is a potential mine field. ALWAYS consult with tax and legal professionals before gifting or transferring US real estate.

10. Should I hold property in an offshore corporation? If you plan to hold the property indefinitely and estate tax is a primary concern then placing the property in a foreign corporation may be advisable. Just remember that corporate tax rates may be more than double the rate that would be paid by an individual selling the same property.

Probably the biggest lesson we have learned when working with foreign clients is that it pays to address issues before the transaction is complete. Planning a few weeks or months ahead is always wise. When dealing with the issues outlined above it can save thousands of dollars in tax.