What US Tax Obligation I have If I Bought US Real Estate From a Foreigner?
FIRPTA Withholding Requirements:
What is FIRPTA?
If you bought US real Estate from a foreign person, you may be subject to U.S. income tax on foreign persons selling U.S. real estate or FIRPTA.
The tax is 15% of the purchase price.
What transactions subject to FIRPTA?
- a foreigner (non-US citizen, a foreign corporation, foreign partnership, foreign trust/estate) sells US real estate to a foreign or a US buyer,
- US real property interest (ownership, co-ownership, etc) is an interest in US real estate:
- -improvements to the land,
- -the personal property associated with US real estate,
How much is the withholding per IRC 1445(a)?
Buyers (not sellers) have to withhold 15% of the amount realized (within 20 days)
Foreign corporations (buyers) have to withhold 21% of the gain realized on dispositions of USRPIs.
What forms do you need to fill out and send?
- 8288-A and 8288-B (with the payment)
The forms are required to be filed by the buyer or transferee (withholding agent).
- when the buyer fills out the form, in line 1 enter the information of BUYER: name, address, ITIN, etc
(Don’t enter Title/Escrow/closing agent information unless they are the buyer. This is a common mistake people make when filling out for 8288)
Once the forms are filled out, they need to be sent to all parties and to the IRS.
The transferee or transferor may request approval of reduced withholding prior to the transfer (pub. 515).
What are the common grounds for this request?
- the like-kind exchange would be an example of why there should be an exemption from withholding
- buying the US property for residing residence for a family
The IRS will respond within 90 days whether the request is granted.
The IRS may issue a withholding certificate that shows that withholding is reduced or eliminated.
Letter 3313/ 3316/3543 may be issued by the IRS to inform or a denial of the reduced/eliminated withholding.
The withholding agent will need to pay the tax shown on the certificate by the 20th day after the day of the disposition
or hods the money in escrow until the IRS determines the tax rate.
Common mistakes made on 8288-A, 8288:
- incomplete buyer info
- not including a copy of withholding certificate
- not sending tax payment with form 8288
- not filing forms after receiving a denial letter
Withheld tax will be credited to the tax due on the annual 1040NR tax return.
How to File form 8288-B (application for withholding certificate)? to request reducing or eliminating withholding
by a foreign person of US property interest.
What are the mistakes when filling out form 8288-B:
- incomplete buyer information or withholding agent information.
- don’t enter closing agent information on line 2
- buyer is most often the withholding agent
Line 4b- if the buyer has an agent (attorney), enter his/her? ITIN or buyer’s ITIN.
If the seller doesn’t have an ITIN (or doesn’t give his ITIN)? you still need to complete 8288 and 8288-A
To receive a tax credit for the tax withheld ITIN must be entered and matched by the IRS.
If the seller doesn’t have their ITIN, mail W-7 separately, enclosing all the supporting documents and copies of 8288, 8288-A, 8288-B
What is 1099-S?
1099-S is a form that reports Proceeds From Real Estate Transactions.
1099-S? needs to have checkmark in line 5 (foreign person checkmark).
Even if you exclude the transaction on your return, still file 1099-S.
Seller will then file their US tax return 1040NR and report gain/loss recognized on the disposition of the US real estate.
The seller will need to attach copies B of F8288-A (or any docs to show that withholding took place) to receive a credit for tax payment owed to the IRS
It doesn’t matter is the buyer foreign or US national- as long as the seller is a foreign national the tax will apply.
If the seller is expecting a loss on the transaction- the 15% tax is still required.
Who is responsible for the withholding?
The buyer is responsible and?files the forms and pays the tax within 20 days of the closing.