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Tax laws in the United States require all persons (foreign or domestic) to pay taxes when they dispose of real property interests. While US persons were paying their taxes, there was no mechanism in place to ensure foreign sellers did the same. To combat this, the Foreign Investment in Real Property Tax Act (known as FIRPTA) was enacted in 1980. If the seller is foreign, this tax act requires buyers to withhold up to 15% of the selling price and remit it to the IRS upon closing. Foreign sellers would then file a US income tax return to claim back any portion considered an overpayment.

Sellers that are not foreign, can complete a certification of non-foreign status, and provide it to the buyer prior to closing. The certificate must contain certain criteria for the buyer to be able to rely on it. Buyers that receive such a document, should retain a copy in their records for no less than 5 years. Withholding is not required when the seller is not foreign.
FIRPTA withholding may still be required even if the LLC is registered in the United States. It depends on how the entity is taxed. Limited liability companies with only one member, are usually considered disregarded entities. This means that the entity is disregarded for tax purposes, even though it is a legally recognized entity. Since the LLC is disregarded, we must look past the entity to see who the owner is. If the owner is one of the foreign person’s mentioned above, then the same FIRPTA rules apply. If the entity has multiple members, or if the entity has elected to be taxed as a corporation, then FIRPTA would not apply in this setting.

As with most rules, there are always exceptions. For example, no withholding is required if the purchase price is $300,000 or less and the Buyer has definite plans to reside in the property 50% of the total occupied days during each of the first two 12-month periods following the date of transfer. If that same buyer purchases a property between $300,001 and $999,999, the 15% can be reduced to 10%. Unfortunately, if the purchase price is $1,000,000 or more, 15% is required, regardless of the Buyer’s intentions.

Another exception to the FIRPTA withholding requirement is when a Withholding Certificate is applied for (and received) prior to closing. It’s a rare occasion, but if it happens, Buyers are only required to withhold the amount shown on the certificate. There are several other exceptions that may apply to the sale of real property. See https://www.irs.gov/individuals/international-taxpayers/exceptions-from-firpta-withholding for more details.

Absolutely! We love to work with other tax professionals. We are very respectful of existing relationships and take these types of engagements seriously and we are happy to assist in any capacity.
Julie Lepore is a Certified Acceptance Agent. She can authenticate your documentation, certify your identity, and submit applications to the IRS on your behalf. Some parts of the application process can be done online if you are not able to meet with her in person.

A foreign person is defined as a non-resident alien individual, a foreign corporation that has not made an election to be treated as a domestic corporation, a foreign partnership, a foreign trust, or a foreign estate.

A resident alien is treated as a US person for tax purposes and is considered a foreign person according to FIRPTA regulations.

If the seller is not able to provide a sworn statement that they are not foreign, and no other exceptions exist, the Buyer should withhold 15% of the total selling price. Under certain conditions, the withholding can be reduced to 10%. If a withholding certificate is not applied for, all funds must be submitted to the IRS within 20 days of the closing, or the buyer could face late penalties.

If funds are not remitted to the IRS in time, buyers can be assessed penalties that include but are not limited to failure to file, failure to pay, and interest that compounds daily.

Sellers can make an application for a withholding certificate if they expect to owe less than the standard required withholding. The application process is robust, as every detail must be supported with documents and paid receipts, and the application must be postmarked no later than the date of transfer. Withholding certificates can be applied for by the buyer or the seller, but typically, it’s the seller that makes application. When there is evidence that the application was mailed timely, Buyers still have to collect the appropriate amount (10% or 15% of the selling price) but they are not required to submit the funds to the IRS. Instead, the withholding amount can be retained in an escrow account until the certificate is approved or rejected. According to the instructions for the Form 8288-B, the IRS will usually act on these applications within 90 days. However, based on our experience with these types of applications, processing times are closer to 9-12 months due to Covid-19 delays.

IRS regulations require all Buyers and foreign Sellers of U.S. real property interests are required to provide their names, addresses, and U.S. tax identification numbers on FIRPTA related tax returns, withholding certificates, and notices of non-recognition when disposing of a U.S. real property interest. While it’s not necessary to have the number prior to closing, every possible effort should be made to apply for a tax ID number, if any party does not have one. See Treasury Decision 9082 for more information.
If you have multiple sellers, but only some of them are foreign, the withholding should be allocated based on their capital contribution. For this purpose, if the sellers are spouses, they are considered to own the property 50/50.