The Foreign Investment in Real Property Tax Act ( Section 1445 of the IRC code) of 1980 (FIRPTA) provided that foreign investment in the U.S. real estate would be subject to U.S. capital gains tax on dispositions of U.S. real property interests [defined as (a) any interest in the U.S real property or (b) any interest in the U.S. corporation in which 50% of its assets constitute U.S real property interests]
Under the law, the buyer or transferee of any U.S. Real property interest is required to (a) withhold and deduct a tax equal to 10% of the amount realized by the seller or transferor upon the disposition of the property regardless of the amount of cash otherwise present in the transaction and (b) file forms 8288 and 8288-A to report and transmit the amount withheld to the IRS, unless one of the five exemptions applies.
However, the transferee’s compliance with the withholding requirement does not relieve the transferor from its FIRPTA tax liability. The tax is designed only to approximate the transferor’s tax on net gain and is still required to file a federal income tax return with the IRS for the year in which the sale occurs and either (a) obtain a refund of any amount over withheld or (b) make additional payments required in excess of the amount of tax previously withheld.
EXEMPTIONS FROM WITHHOLDING:
1. Transferor furnished Non-Foreign Status Certification. No withholding is necessary if the seller or transferor furnished to the transferee a certification stating that the transferor is not a foreign person and stating their U.S. taxpayer identification number. The transferee must keep such certification for at least 5 years.
2. Purchase Price for Residence. No withholding is necessary if the property is accuired by an individual transferee who is an owner occupant and the price does not exceed $300,00.00
3. Transferee Receives IRS Withholding Certificate. The withholding may be reduced or eliminated pursuant to qualifying statement issued by the IRS. This certificate may be issued by the IRS in cases where (a) the transferor is NOT requred to recognize gain or loss with respect to the transfer in compliance with the requirements of Treasury Regulations S1.1445-2(d)(2) and (b) provides a copy of the notice to IRS within 20 days of the property transfer. Have a Tax Attorney review the notice to ensure compliance with requirements to the exemption before closing.
5. U.S. Corporation not USRPI. Sale of stock in a U.S. corporation may be except from withholding under certain circumstances. Consult with your attorney on maters related to the sale of stock.