Congress has amended the requirements of the Foreign Investment in Real Property Tax Act (FIRPTA) and the changes take effect February 16, 2016, beginning with closings on or after February 17, 2016. FIPTA requires foreign nationals to pay U.S. income tax on the gains resulting from selling real estate located in the United States and its territories. The Act imposes a duty upon a U.S. national buyer to deduct and withhold a portion of the sales price and to report the sale to the IRS. The regulations typically impose the responsibility for this withholding requirement upon the closing attorney then handles any required withholding and remittance to the IRS on behalf of their client, the buyer.
For closings taking place after February 16, 2016, the rules for the amount of FIRPTA withholding are summarized as follows:
- If the property will not be used as the buyer's primary residence, the withholding rate is 15% of the amount realized (generally the sales price), and reporting is required.
- If the property will be used as the buyer's primary residence and the amount realized is $300,000 or less, no withholding is required and no Form 8288 or 8288-B must be filed.
- If the property will be used as the buyer's primary residence and the amount realized exceeds $300,000 but does not exceed $1,000,000, the withholding rate is 10% of the amount realized, and Form 8288 or 8288-B must be filed.
- Regardless of what use of the property will be made by the buyer, when the amount realized exceeds $1,000,000, the withholding rate is 15% of the amount realized and Form 8288 or 8288-B must be filed.
The IRS has released new versions of Form 8288 and 8288-B to reflect the increase in the FIRPTA withholding rate and effective date, February 17. The traditional FIRPTA affidavits that closing attorneys have been using are still important to obtain the confirmations necessary to comply with the above requirements, -- especially the buyer's intention to use as their primary residence.
In order to comply with the Act, the closing attorney must request the Seller's Taxpayer Identification Number (TIN) for the withholding form. If the Seller does not supply an Individual TIN, the closing attorney still has to remit the withheld amount to the IRS, but the Seller will then have to deal with the IRS for any available refund.
When applicable, the withholding requirement can be eliminated or reduced if the following procedure is followed:
1. TINs for each Seller (or Form W-7 applications for ITINs for each Seller) must be provided.
2. Request for reduced withholding by the issuance of a Withholding Certificate (IRS form 8288-B) must be submitted to the IRS. Seller must provide explanation and proof of the anticipated taxes (must be less than the withholding percentage).
3. Seller must provide/submit proof that immediate prior owner of the property was not a "Foreign Person". (Non-Foreign Affidavit signed by that Seller at that closing?).
As noted above, no withholding is required regarding the sale if the real property is acquired by the Buyer for use by the Buyer as the principal residence, and the amount realized from the sale of the property does not exceed $300,000. See IRC Section 1445(b)(5) and IRS Publication 8288 Instructions, which provides as follows:
Purchase of residence for $1,000,000 or less. Withholding is required at a reduced rate of 10% in the case of a disposition of:
A property which is acquired by the transferee for use by the transferee as a residence, and
The amount realized for such property does not exceed $1,000,000.
But see Purchase of residence for $300,000 or less immediately following.
You are not required to withhold if any of the following applies:
Purchase of residence for $300,000 or less. One or more individuals acquire U.S. real property for use as a residence and the amount realized (in most cases the sales price) is not more than $300,000. A U.S. real property interest is acquired for use as a residence if you or a member of your family has definite plans to reside in the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. Do not take into account the number of days the property will be vacant in making this determination. No form or other document is required to be filed with the IRS for this exception; however, if you do not in fact use the property as a residence, the withholding tax may be collected from you.
This exception applies whether or not the transferor (seller) is an individual, partnership, trust, corporation, or other transferor. However, this exception does not apply if the actual transferee (buyer) is not an individual, even if the property is acquired for an individual.
Transferor not a foreign person. You receive a certification of nonforeign status from the transferor, signed under penalties of perjury, stating that the transferor is not a foreign person and containing the transferor's name, address, and identification number (social security number (SSN) or employer identification number (EIN)). The transferor can give the certification to a qualified substitute (defined on this page). The qualified substitute gives you a statement, under penalties of perjury, that the certification is in the qualified substitute's possession. If you receive a certification (or statement), the withholding tax cannot be collected from you unless you knew that the certification (or statement) was false or you received a notice from your agent, the transferor's agent, or the qualified substitute that it was false. The certification must be signed by the individual, a responsible officer of a corporation, a general partner of a partnership, or the trustee, executor, or fiduciary of a trust or estate.
A disregarded entity may not certify that it is the transferor for U.S. tax purposes. Rather, the owner of the disregarded entity is treated as the transferor of the property and must provide the certificate of nonforeign status to avoid withholding under section 1445.
A foreign corporation electing to be treated as a domestic corporation under section 897(i) must attach to the certification a copy of the acknowledgment of the election received from the IRS. The acknowledgment must state that the information required by Regulations section 1.897-3 has been determined to be complete. If the acknowledgment is not attached, you may not rely on the certification. Keep any certification of nonforeign status you receive in your records for 5 years after the year of transfer.
You may also use other means to determine that the transferor is not a foreign person. But if you do, and it is later determined that the transferor is a foreign person, the withholding tax may be collected from you.
Exemption is also provided if the Transferor provides a certification that he is exempt from recognition of tax by reason of the application of non-recognition provisions of the Internal Revenue Code. This is NOT a certification that the Transferor has no gain on which to pay tax; it is a certification that the Transferor is exempt from tax even if he has gain.
The link to the IRS website Form 8288 instructions is: https://www.irs.gov/instructions/i8288/ar01.html
Even if withholding is not required, the closing attorney must report the sale to the IRS on Form 1099-S, thus requiring the closing attorney to request a SSN or ITIN for the Seller. Sales or exchanges involving foreign sellers are not exempt from the Form 1099-S filing requirements.
Form 1099-S has an exception to this reporting requirement where the Seller provides written certification that the property being sold is his principal residence and if the sale is for $250,000 or less. I don't understand this exception to apply where the Seller is a non-resident alien unless otherwise exempt.
The Form 1099-S Instructions state that a foreign person must provide to the closing attorney their ITIN on Form W-8. Form 1099 Instructions say that, in the case of a foreign person, the foreign person's TIN should be requested on Form W-8. If the requested person fails to provide a TIN, then the 1099 form is to be filed without the TIN. The closing attorney must retain certification that a Form W-8 was provided to the requested person and that a TIN was requested from him, to avoid penalties being imposed on the closing attorney.
The Seller should obtain an ITIN on Form W-8 to avoid possible penalties, to file the income tax return required to report the sale.
The changes to FIRPTA amend 26 U.S. Code §1445 and are set forth in Section 324 of H.R. 2029, a lengthy bill entitled "The Protecting American Taxpayers from Tax Hikes Act" ("PATH" for acronym lovers), that became law on December 18, 2015 as Public Law 114-113.