Alexander Schmidt & Bill Iannarelli
What you need to know as a nonresident who sells U.S. real property interests
If you are selling a piece of U.S. real estate, you may have a tax withholding obligation to the purchaser. The FIRPTA rules require that buyers of U.S. real property know the residency status of whoever is selling the property for reasons explained below.
FIRPTA requires that a purchaser of U.S. real property withhold tax on the gross sale price if the seller is a non-U.S. person. Real property for these purposes is either a piece of real estate or a corporation that holds real estate. A non-U.S. person for this purpose includes all foreign persons and foreign entities selling or transferring property located in the U.S. Any withholding tax owed (including interest) that isn’t remitted becomes a liability of the purchaser.
FIRPTA Withholding Rate Increase
As of February 2016, the FIRPTA withholding tax rate has increased to 15% from the previous rate of 10%. The tax is calculated based on the gross sales price with no consideration for the actual gain or loss. As a result, even on a loss transaction, foreign real property sellers are looking at the potential of a 15% tax withholding from the gross proceeds.
As an example, assume (as a foreign person) you sold a piece of real estate on June 1st for $1,000,000. The purchaser would be obligated to withhold $150,000 of the sale price and remit this to the IRS. This is true regardless of what your basis in the property was at the time of the sale. However, it is possible to request a reduced rate of withholding in advance of the closing to reduce or possibly eliminate this withholding. This can save a substantial amount of money, as any tax that isn’t owed but is withheld would not be available for refund until the following year upon filing a tax return.
There is a process by which you can apply for an exemption from or reduction to this mandatory withholding. Form 8288-B can be filed on behalf of the seller. As long as this form is filed by the date of closing, the purchaser will not be required to remit the withholding tax until notified the form has been processed by the IRS.
- Any purchaser of a U.S. Real Property Interest (USRPI) should be aware of the seller’s U.S. residency status.
- If you are a foreign seller of USRPI, the purchaser will withhold and remit 15% at settlement unless you apply for a withholding exemption.
- There are exceptions from the withholding rules. For example, if the gross sales price is $300,000 or less and the purchaser intends to use the property as a residence, there is no withholding required.
- All of this is in an effort to reduce the amount of withholding up front prior to filing of the tax return by the seller.
We at Freed Maxick have vast experience with these and other international matters. Please contact us if you have any questions.