Is a Foreign Seller Realizing a Loss on the Sale Subject to Withholding?
- Yes. Regardless of whether a Foreign seller is realizing a gain or loss, the buyer is still required to withhold.
What if the Foreign Seller wants to utilize the Funds for a 1032 Exchange?
- Unfortunately, withholding is still required.
Are there any Exceptions or Exemptions to FIRPTA Withholding?
- Yes! See below, “What if FIRPTA Withholding Exceeds the Amount of Tax Owed?”
What if the FIRPTA Withholding Exceeds the Amount of Tax Owed?
You may be wondering if FIRPTA withholding is refundable. If the 15% FIRPTA withholding exceeds the tax actually owed by the foreign seller, then there are several options:
- File a US Tax Return Requesting a Refund: This is essentially the “default” method. In this case, the FIRPTA Withholding is withheld at closing and sent to the IRS. The IRS sends proof of the withholding (a stamped Form 8288-A) which the foreign seller attaches to his/her US Income Tax Return. If the tax owed calculated on the return is less than the FIRPTA withholding, then the IRS shall (eventually) refund the difference.
- File an 8288-B “Certificate of Withholding BEFORE Closing: A Certificate of Withholding is basically a request sent into the IRS requesting a reduction or elimination of the FIRPTA withholding, typically due to the foreign seller’s tax due being less than the withholding amount. Supporting documentation must be sent with the application. If the application is sent on or before closing, then the withholding agent may maintain the FIRPTA withholding in escrow pending the IRS’s decision, which typically takes 90-120 days to process. The IRS issues a certificate approving either a reduction or elimination of the FIRPTA withholding. With this certificate, the withholding agent can release the necessary funds to the foreign seller.
- File an 8288-B “Certificate of Withholding” AFTER Closing: This is also known as the “early refund” application. It is the same application as that which is sent before closing, but if sent after closing then the withholding agent cannot maintain the withholding amount in escrow, it MUST be sent to the IRS within 20 days of closing. The Foreign Seller would instead file the 8288-B application together with Form 843 “Claim for Refund.”
It is important to note that to submit an 8288-B Application, the foreign seller must prove that at the time of their purchase of the US real estate that all FIRPTA obligations were satisfied. This is typically accomplished either by showing an affidavit of non-foreign status received from the seller, or showing that a FIRPTA withholding was sent into the IRS on Form 8288. Failure to provide such evidence will result in summary denial of the 8288-B application. This may be difficult to obtain if for instance the property was purchased many years ago or the foreign seller did not keep copies of the closing documents from purchase.
Furthermore, the approval of an 8288-B application is entirely within the discretion of the IRS. The IRS may approve, deny, or require another value to be withheld. Such a decision is final and not subject to appeal, and withholding must be sent to the IRS within 20 days of receiving such a decision. If the foreign seller believes they are overpaying, they will need to file for a refund via a US income tax return.
How Long Does it Take for the IRS to Issue a Refund?
It’s hard to say. Historically, the IRS has taken approximately 90 days to respond to an 8288-B application. However, recent COVID-related backlogs increased this time period to up to 9-12 months. As of December 2021, we are seeing processing times of 8288-B applications of around 5 months, and hopefully, in 2022 we should see a return to the standard 90-day processing.
If a refund request is made on a US income tax return, then allow at least 6-8 months for the IRS to process the refund, as tax returns filed by foreign persons tend to require additional scrutiny.
What if the Title is Held by both US and Foreign Persons?
If there are both US and Foreign Transferors then withholding is only required in the Foreign transferor’s interest.
Does a Foreign Seller need a US Tax ID Number in order to Process the FIRPTA Withholding?
Yes. If the foreign seller was previously issued a Social Security Number (“SSN”) (for instance if they temporarily worked in the US in the past) then he/she should utilize this same number, as Social Security Numbers generally do not expire.
If the individual foreign person was previously issued an Individual Taxpayer Identification Number (“ITIN”) then they may need to re-apply for a new one, as ITIN expires if unused for a certain period of time.
If the individual foreign person has never been issued an ITIN or SSN, then they will need to apply for one, which is done together with the FIRPTA withholding procedure. This will require a certified copy of such individual’s passport either by an IRS Accredited Acceptance Agent or at a local US consulate.
If the foreign person is an entity, then it will require an Employer Identification Number (“EIN”). This is typically easier and faster to obtain than an SSN or ITIN and can be done over the phone.
All Foreign Persons must allow for enough time to not only gather necessary documents but also to obtain a certified copy of passports if required.
Any transaction where there is a “US Real Property Interest” (“USRPI”) being transferred by a foreign transferor requires special attention from both buyer and seller due to the requirements of the Foreign Investment in Real Property Tax Act (“FIRPTA”). FIRPTA is a highly complex area of US tax law, but most foreign buyers and sellers will recognize the acronym when there is a sale of US real property involving a foreign seller, which generally requires a 15% withholding of the entire sale price.
