When a foreign investor (individual/partnership/corporation/trust/estate) sells their United States Real Property Interest (USRPI), the Buyer must withhold up to 15% of the total amount realized from the sale and remit that amount to the Internal Revenue Service unless certain exemptions are met. FIRPTA was implemented to reduce the risk of foreign taxpayers selling their USRPI and avoiding paying capital gains taxes.
The Foreign Investment in Real Property Transfer Act (IRC 1445 & Treasury Regulations 1.1445), more commonly known as “FIRPTA” is a federal law that requires withholding on dispositions of U.S. real estate by “foreign persons", defined as a nonresident alien individual, a foreign corporation that does not have a valid election under section 897(i) to be treated as a domestic corporation, a foreign partnership, a foreign trust, or a foreign estate. The law imposes an obligation upon a transferee (buyer) of any interest in the real estate to withhold 15% of the sale price (10% if a personal residence with a sale price of $1 Million or less).
However, if the sale price is under $300,000 and the transferee intends to reside in the property no withholding is required. The buyer (or designated withholding agent is obligated to withhold 15% of the sale price of the real estate (10% if a personal residence with a sale price of $1 Million or less) and send it to the IRS within 20 days after the date of transfer.
Here is a solution:
Withholding Certificate. Withholding can be delayed, reduced or eliminated if the Exchanger applies for and receives a Withholding Certificate (IRS Form 8288-B). The application for a Withholding Certificate must be submitted to the IRS on or before the Relinquished Property closing, along with a copy of the Replacement Property contract. The Exchanger must give a copy of the application to the withholding agent. Withholding is still required at 15% of the sale price of the real estate (10% if a personal residence with a sale price of $1 Million or less), but the filed application permits the withholding agent to hold the withheld amount until the IRS makes a final determination. The IRS must act upon an application within 90 days. If the IRS declines to grant the exemption, payment of the withholding must be sent to the IRS within 20 days after the receipt of the IRS’ notice of determination.
If the Withholding Certificate is not received prior to the purchase of the Replacement Property, the Exchanger will not have use of the Withholding funds. Unintentional boot caused by withholding can be avoided if the Exchanger contributes sufficient additional cash into the escrow or exchange account to cover the applicable withholding amount so that the full 100% of the sale proceeds will be available to buy Replacement Property. It is possible to use all of the exchange funds and have a full deferral without adding cash, but advance planning is necessary to allow sufficient time to receive the Withholding Certificate.
Simultaneous Exchange with NO Boot. Withholding is not required if the exchanger does a simultaneous exchange where the sale and purchase occur on the same day and there is absolutely no boot (including no debt relief), but the Exchanger must provide the Buyer (as well as settlement agent) with a signed FIRPTA Notice of Non-Recognition Transfer prior to closing. The IRS does not require a particular form, but the Notice must include certain information. The buyer may rely upon the Notice unless they have actual knowledge that the facts stated are untrue (for example, if the closing statements indicate that there will be some form of boot). The buyer must send the Notice of Non-Recognition Transfer to the IRS no later than 20 days after the date of transfer. The Exchanger should also provide a copy of the Notice of Non-Recognition to the QI.
Other Required Documents. The foreign Exchanger must provide QI and Settlement Agent with an IRS Form W8-BEN (in lieu of a Form W-9) that discloses the Exchanger’s Tax Identification Number (TIN). A TIN can be applied for directly with the IRS. CR Capital 1031 will not disburse any funds (regardless of withholding) on behalf of a Foreign Person or Entity Exchanger who does not have a TIN.