Posted by V.K. [Mel] Melhado III on Saturday, February 12th, 2011 at 6:09pm.

The U.S. tax rules that apply to ownership and disposition of U.S. real estate by foreign owners are different in some important respects from the rules that apply to U.S. owners.

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 authorizes the United States to tax foreign persons on dispositions of U.S. real property interests. 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.

There are, however, exeptions to the rule...

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

Reporting Forms.  Two forms are generally used for reporting and paying the tax to the IRS regarding the acquisition of U.S. real property interests.

1.    Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests (Section 1445);

2.    Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests (Section 1445).

Transferees must use Forms 8288 and 8288-A to report and pay to the IRS any tax withheld on the acquisition of U.S. real property interests. These forms must also be used by corporations, partnerships, estates, and trusts that must withhold tax on distributions and other transactions involving U.S. real property interests. You must include the U.S. TIN of both the transferor and transferee on the forms.

Please note that FIRPTA applies to what it defines as a U.S. real property interest, which includes not only interests in land, but interests in buildings, mines, wells, crops and timber as well. Because Congress was concerned that foreign persons would try to avoid FIRPTA by incorporating their U.S. real estate holdings, a U.S. real property interest is defined to also include any interest in a U.S. corporation if that U.S. corporation is a “U.S. real property holding company,” with the result that a disposition of its stock by a foreign investor may be subject to federal income tax under FIRPTA.

V.K. [Mel] Melhado PA
Fine Home Specialist
Preview Naples Properties, LLC
Direct: 800.708.8028


Jennifer wrote: Mel, I'm glad to see real estate professionals like yourself trying to educate consumers on FIRPTA requirements. Here in Florida, we are faced with many transactions where either the buyer or seller may be a foreign resident. It's in everyone's best interests to understand FIRPTA and make sure the necessary paperwork and documentation is taken care of well ahead of the closing. Thanks for helping to get the word out!

Posted on Saturday, April 7th, 2012 at 7:17pm.

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