With the increase in foreign investment in the US, understanding withholding requirements has become very important. Most real estate agents don’t understand it (this makes sense because they are not tax professionals) and sometimes attorneys even struggle with it. The reality is that the foreign investor should have a general understanding of how FIRPTA works and when it will be applicable to them.
If a non-resident alien sells or disposes of a U.S. real property interest, the purchaser is generally required to withhold U.S. taxes at the time of closing (IRC §897). The withholding amount is normally 10% the total amount received by the seller in the form of cash, fair market value of other property transferred and/or assumption of the seller’s liabilities. The amount can be reduced or eliminated in the following circumstances:
- The sales price is not more than $300,000 and the purchaser 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.
- The alien provides a certification stating, under penalties of perjury, that he or she is not a foreign person.
- The alien provides a withholding certificate showing that a lesser amount should be withheld.
- The alien provides a written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code (for example, the house qualified as the alien’s principal residence for two of the last five years).
- The amount the alien realizes on the transfer is zero.
- The property is acquired by the U.S. government, state, possession, political subdivision or the District of Columbia.
- Certain other provisions related to disposition of corporate or partnership interests or the lapse of an option.