FIRPTA Withholding- Withholding of Tax on Dispositions of United States Real Property Interests

FIRPTA Withholding authorizes the U.S. Government to tax foreign persons (transferors) on dispositions of their real property interests within the United States.  

“Disposition” is defined under FIRPTA to mean a disposition for any purpose of the Internal Revenue Code.  This includes, but is not limited to a sale or exchange, liquidation, redemption, gift, or transfers.  Under the Act, persons purchasing U.S. real property interests from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (10% for dispositions occurring prior to February 17, 2016) of the amount realized on the disposition.  Note that special rules govern dispositions of foreign corporations.

In the majority of cases, the person/entity purchasing the real property interest (transferee/buyer) is the withholding agent.  Transferees that fail to provide for FIRPTA Withholding, or that do so incorrectly, may be help liable for the tax.  In cases in which a U.S. business entity disposes of a U.S. real property interest, the business entity itself, rather than the transferee, is the appropriate FIRPTA withholding agent.

United States Real Property Interest

A U.S. real property interest is an interest (other than as a creditor) in real property or certain personal property that is associated with the use of real property, which is located within the United States and/or the U.S. Virgin Islands.  

A U.S. property interest also encapsulates an interest (other than as a creditor) in any domestic corporations unless it is established that the corporation was not, at any time, a U.S. real property holding corporation during the shorter of either (1) the period during which the interest was held or (2) the 5-year period ending on the date of disposition (applicable periods).  

An interest in a corporation is not a U.S. real property interest if:

      1. The corporation did not hold any U.S. real property interests on the date of disposition;
      2. All U.S. real property interests held by the corporation at anytime during the shorter of the applicable periods were disposed of in transactions in which the full amount of any gain was recognized; and
  • For dispositions dated after December 17, 2015, the corporation (and any predecessor of the corporation) was not a Regulated Investment Company (RIC) or a Real Estate Investment Trust (REIC) during the shorter of the applicable periods during which the interest was held.

Rates of FIRPTA Withholding

The transferee must deduct and withhold tax on the total amount realized by the foreign person on the disposition.  The rate of FIRPTA withholding is generally 15% (10% for dispositions dated prior to February 17, 2016).  The amount realized is the sum of:

    1. The amount paid, or to be paid (principal only);
    2. The fair market value of other property transferred, or to be transferred; and
    3. The amount of any liability assumed by the transferee, or to which the property is subject, immediately before and after the transfer

If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain that is recognized on the distribution to its shareholders.

A domestic corporation must withhold FIRPTA tax on the fair market value of the property distributed to a foreign shareholder if:

    1. The shareholder’s interest in the corporation is a U.S. real property interest; and
    2. The property distributed is either in redemption of stock or in liquidation of the corporation.

For distributions prior to February 17, 2016, the corporation generally must withhold 10% of the amount realized by foreign person.  For distributions after February 17, 2016, the withholding rate increases to 15% of the amount realized.

For a broad overview of the IRS regulations pertaining to the Foreign The Foreign Investment in Real Property Tax Act of 1980, click here.