Withholding of Tax on Dispositions of United States Real Property Interests
The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. A “disposition” includes a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% of the SELLING PRICE.
In most cases, the transferee/buyer is the withholding agent and therefore must find out if the transferor is a foreign person. If the transferor is a foreign person and the transferee/buyer fails to withhold, then the transferee/buyer will be held liable for the tax.
For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent. If the property transferred was owned jointly by U.S. and foreign persons, the selling price is allocated between the sellers based on the capital contribution of each seller/transferor. A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain it recognizes on the distribution to its shareholders.
A domestic corporation must withhold tax on the fair market value of the property distributed to a foreign shareholder if:
- The shareholder’s interest in the corporation is a U.S. real property interest, and
- The property distributed is either in redemption of stock or in liquidation of the corporation.
Definition of U.S. Real Property Interest
A U.S. real property interest is an interest, other than as a creditor, in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of real property (such as farming machinery). It also means any interest, other than as a creditor, in any domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or 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.Such corporation did not hold any U.S. real property interests on the date of disposition, 2.All the U. S. real property interests held by such corporation at any time during the shorter of the applicable periods were disposed of in transactions in which the full amount of any gain was recognized, and 3.For dispositions after December 17, 2015, such corporation and any predecessor of such corporation was not a RIC or a REIT during the shorter of the applicable periods during which the interest was held.