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FIRPTA Foriegn Investors Real Property Tax Act

IRS Forms
FIRPTA in my words: F.I.R.P.T.A. stands for the Foreign Investment of Real Property Tax Act. It was established in 1980 to make sure that Foreign Investors don't skip out on the IRS (leave town without paying their taxes). The act says that the purchaser (because they have the funds to close a transaction in their possession prior to closing) is to send 10% of the sellers proceeds to the IRS at closing. These funds are to accompany form 8288a that is filled out by an accountant, although a purchaser can fill this form out themselves, I recommend hiring a Lawyer to help fill it out.

The purchaser, after having the escrow agent send off form 8288a and a check (for 10% of the seller's proceeds) has nothing more to do with the seller's tax or FIRPTA. The escrow agency normally sends the form with a cashiers check to the I.R.S. at closing. And then it's over for the buyer.

The seller, on the other hand, must then apply for a T.I.N. number (Tax Identification Number) using a Form W-7 and then they file their income tax in order to release the funds being held by the IRS. Normally, a seller would not have to file a W-7 to get a T.I.N. until within 15 days following the "closed" transaction. Normally there would be no delay in the closing unless a buyer for some reason chooses not to send the 10% withholding to the IRS. In this case, the sale could be delayed 6-8 weeks waiting on the seller to obtain the TIN.

FIRPTA Withholding

Buyer's Forms
  • Form 8288 The buyer will withhold tax and send it to the Internal Revenue Service. This is the form that is used to report the withholding and remit the tax. The instructions are included with this form.

    Form 8288a The buyer will fill this in and attach copies to Form 8288. See the instructions to Form 8288 for how this works.

Seller's Forms

 

  • Form 8288b The seller usually doesn't want tax withheld. This is the form used to ask for reduced or eliminated Federal tax withholding. 
     
Withholding of Tax on Dispositions of United States Real Property Interests

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. A disposition means disposition for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations that are considered U.S. real property holding corporations. Persons purchasing U.S. real property interests (transferee) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 10 percent of the amount realized (special rules for foreign corporations) Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.

The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted pursuant to a withholding certificate issued by the IRS.

  • A disposition includes the sale of any U.S. real property interests in the United States or U.S. Virgin Islands.
  • Generally speaking, in reference to the disposition of a U.S. real property interest, the foreign person disposing of the US real property interest is referred to as the transferor.
  • The purchaser of the U.S. real property interest is referred to as the transferee.
  • Generally, the amount realized is the purchase/sales price of the U.S. real property interest but can also include any property received by the transferor and any liability relieved of by the transferor.
  • Generally, the buyer/transferee must determine if the seller is a foreign person. If so, the buyer/transferee is responsible for the withholding taxes.
  • The buyer/transfer may be held liable for the tax that should have been withheld on the purchase.

 

One of the most common exceptions to FIRPTA withholding is that the buyer/transferee is not required to withhold tax in a situation in which the buyer/transferee purchases real estate for use as his personal residence and the purchase price is not more than $300,000.

 

For additional information on the withholding rules that apply to corporations, trusts, estates, and REITs, refer to section 1445 of the Internal Revenue Code and the related regulations. For additional information on the withholding rules that apply to partnerships, refer to discussion under partnership withholding. Also consult IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, section U.S. Real Property Interest.

Additional information may be obtained from:

Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409.

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the

 

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Ryan Milligan
Personal Cell: (808) 640-0072
Email: ryan@lfr123.com
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