The sale of U.S. real estate by a foreign person is subject to the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) tax withholding. FIRPTA requires a buyer of real estate to withhold 10% of the gross sales price (subject to certain exceptions) and remit the amount to the IRS.
However, the amount that must be withheld from the sale can be reduced or eliminated if the seller receives a withholding FIRPTA certificate issued by the IRS. The seller, the seller’s agent, or the buyer may request a withholding certificate. A withholding certificate may be issued due to:
- A determination by the IRS that a reduced withholding is more appropriate because either:
- The amount that was originally to be withheld would be more than the seller’s maximum tax liability; or
- Withholding of the lower amount would not jeopardize any collection of the assessed tax.
- The exemption from U.S. tax of all gain realized by the seller; or
- An agreement between the seller and buyer is in place for the payment of tax, which provides security for the tax.
The applications for withholding FIRPTA certificates are divided into six main categories. These categories provide specific information that is needed to process the applications. The six categories are:
- Applications based on a claim that the transfer is entitled to non-recognition treatment or is exempt from income tax;
- Applications that are based on the calculation of the seller’s maximum tax liability;
- Applications processed under installment sale rules;
- Applications that are based on an agreement for the tax payment with applicable security;
- Applications for blanket withholding FIRPTA certificates; and
- Applications based on any other basis or criteria.
Getting a withholding certificate is not always easy. The applicant must make available all the required information to verify that the representations relied upon in accepting the agreement are complete and accurate. In addition, the IRS needs comfort that obligations by the applicant will be performed pursuant to the agreement. Should the applicant fail to provide the required information, the application will most likely be rejected, unless the IRS determines that an extension is warranted.
Any authorized person signing the application (including anyone under a power of attorney on Form 2848) must verify under penalties of perjury that all representations are true, correct, and complete to that person’s belief and knowledge. Should the application be based on information provided by another party to the deal or transaction, that information is also required to have a written verification signed under penalties of perjury by that party.
A seller who applies for a withholding certificate must notify the buyer in writing that the certificate has been applied for on the day of or the day prior to the actual transfer. If an application for a withholding certificate is submitted to the IRS before or on the date of a transfer and the application is still pending with the IRS on the date of transfer, the correct withholding tax must be withheld, but does not have to be reported and paid over immediately. The amount withheld (or lesser amount as determined by the IRS) must be reported and paid over within 20 days following the day on which a copy of the withholding certificate or notice of denial is mailed by the IRS.
The IRS will generally act on these requests within 90 days after receipt of a complete application including the Taxpayer Identification Numbers (TIN’s) of all the parties to the transaction.