Among the many documents which are presented and processed during escrow is a certificate of non-foreign status. The reason for this document is to protect the property buyer from liability for the IRS withholding tax which applies if the seller is a foreign person. If the Seller is a US Citizen or a US Resident then FIRPTA does not apply. If the Seller is not a US Citizen or a US Resident then the Buyer may have to withhold 10% of the sale price at the closing. Although the taxable gain of a transaction is earned by and thus taxable to the foreign seller, the buyer is held liable for the tax if it is not paid by the foreign seller.

It is the buyer, not the seller, who is obligated for withholding and reporting required by FIRPTA at the time of the sale. Unless the transaction is exempt from withholding, the buyer must report the sale to the I.R.S. on Forms 8288 and 8288-A, and pay the required tax withholding, by the 20th day after the date of transfer. The “date of transfer” is the first date consideration is paid or a liability transferred (excluding payments before title passage such as earnest money and deposits). This deadline is extended to the 20th day after the I.R.S. accepts or denies a legitimate application for a “withholding certificate” if the application is filed on or before the transfer date. In order to complete the appropriate reporting forms or apply for a withholding certificate the foreign person must have a tax identification number (ITIN). To apply for an ITIN the foreign person must file form W7 with the IRS.

United States tax law requires that all persons, whether foreign or domestic, must pay income tax on dispositions of interests in U.S. real estate (U.S. real property interests). Domestic persons are subject to this tax as part of their regular income tax. Internal Revenue Code sections 897 and 6039C were enacted in FIRPTA; the Act also made conforming amendments to various other provisions of the Internal Revenue Code.

Foreign persons are taxed only on certain items of income, including effectively connected income and certain U.S. source income. Foreign persons, however, are not taxed on most capital gains. Internal Revenue Code section 897, as enacted by FIRPTA, treats the gain on a disposition of an interest in United States real property as effectively connected income subject to regular federal income tax.

To ensure tax collection from foreign taxpayers, FIRPTA requires buyers of U.S. real property interests to withhold 10% of the sales price. The seller may apply to the Internal Revenue Service (IRS) to reduce this 10% to the amount of tax estimated to be due. The IRS routinely and quickly approves such seller applications.

FIRPTA applies in virtually all cases where a foreign owner of a U.S. real property interest disposes of that interest. Provisions of the law which would prevent recognition of gain generally do not apply unless the seller receives a U.S. real property interest in a qualifying nonrecognition exchange.

Prior to a transfer, the seller may apply for a IRS withholding certification to reduce or eliminate the required amount of the withholding. The IRS is required to act on a request for a withholding certificate within 90 days of receipt of the application. Once the withholding certificate is granted then the escrow may release the 10% (amount withheld in escrow at closing) to the Seller. If the withholding certificate is denied then withholding amount must be tendered to the IRS within 20 days of the issuance of the denial of the application.

The IRS generally grants withholding certificates (no withholding required if certificate issued) for the following reasons:

1. 10% withholding exceeds seller’s maximum tax liability;

2. Seller is entitled to nonrecognition treatment (e.g.1031 Tax Deferred Exchange)or is exempt from tax;

3. An agreement for the payment of tax providing security for the tax liability, entered into by the transferee or transferor.


Persons and property subject to tax

Foreign persons are generally exempt from U.S. tax on capital gains.

Under FIRPTA, however, foreign persons are subject to tax on gains from disposition of U.S. real property interests (USRPIs).

An interest in property is any direct equity interest in the property, such as a fee simple ownership, but does not include interests solely as a creditor. Thus, co-owners of property each hold an interest in the property, but a bank holding a mortgage does not.

Real property is land, buildings, and land improvements. Generally, whether property is or is not real property is determined under U.S. tax law concepts, not state law. Thus, gas pumps and awnings at gas stations are not real property under U.S. Federal tax law, even though they may be realty under state law. For FIRPTA purposes, real property also includes unsevered natural products of the land (e.g., oil and gas in place in the ground, uncut timber, unharvested crops) and personal property associated with the use of real property.

A United States real property interest (USRPI) includes shares of a U.S. real property holding corporation (USRPHC). A USRPHC includes any U.S. corporation if more than 50% of such corporation’s assets were USRPIs at any testing date. Disposition of an interest in a USRPHC is subject to the FIRPTA tax and withholding but is not subject to state income tax. This may be compared with the disposition of a USRPI owned directly, which is subject to the lower federal capital gains rate but is also subject to the state income tax.


Buyers of U.S. real property interests are required to withhold 10% of the full sales price on ANY purchase of a USRPI, subject to only four exceptions. Withholding is not required:

  • By a purchaser for use as a residence for a price $300,000 or less, OR
  • Where the purchaser receives a statement from the seller that the seller is a not a foreign person.
  • Upon acquisition of an interest in a nonpublicly traded domestic corporation where the corporation provides the required affidavit.
  • Upon acquisition of shares of a publicly traded corporation.

To the extent withholding is required, the amount of withholding may be reduced below 10% of the full price only upon certification by the IRS that a reduced amount applies. Such certification is permitted only if the seller applies to the IRS for reduced withholding by filing Form 8288-B no later than the closing date of the sale. The certification will specify the proper amount of withholding, subject to the stated closing price.

Penalties apply to a purchaser who fails to withhold, file Form 8288 with the IRS,or pay the required withholding within 20 days of the sale.

Sources: Retrieved February 12, 2014

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