Overview of Withholding under FIRPTA for Sales by Individuals

LB&I Transaction Unit

Knowledge Base – International

Library Level Number Title

Shelf Individual Inbound

Book 15 Withholding (Individual Inbound)

Chapter 15.2 Nonresident Alien FIRPTA Issues

Section

Subsection

Unit Name Overview of Withholding under FIRPTA for Sales by Individuals

Primary UIL Code 9442.02 Nonresident Alien FIRPTA Income and Withholding

Document Control Number (DCN) WIT/T/15_02-01

Date of Last Update 09/19/17

Note: This document is not an official pronouncement of law, and cannot be used, cited or relied upon as such. Further, this document may not contain a

comprehensive discussion of all pertinent issues or law or the IRS's interpretation of current law.

Table of Contents

(View this PowerPoint in “Presentation View” to click on the links below)

General Overview

 Issue and Transaction Overview

 Transaction and Fact Pattern

Summary of Potential Issues

Audit Steps

Index of Referenced Resources

Training and Additional Resources

Glossary of Terms and Acronyms

Index of Related Practice Units

Issue and Transaction Overview

Overview of Withholding under FIRPTA for Sales by Individuals

Foreign persons are liable for U.S. income tax on a sale or other taxable disposition of U.S. real property. U.S. income tax treaties

generally allow for such U.S. taxation of a foreign person’s taxable disposition of U.S. real property (such as the 2006 U.S. Model

Income Tax Convention, Article 6). In order to ensure payment of tax on such real property dispositions by foreign persons, a

withholding tax is imposed on specified withholding agents involved in the transaction (for example, the purchaser). The general rules

of this withholding mechanism are covered in this Practice Unit.

Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), a foreign person who disposes of a U.S. real property

interest is subject to the income tax withholding on the transaction. FIRPTA gives the United States the authority to tax foreign persons

on the disposition of U.S. real property interests. For FIRPTA purposes, a disposition means a “disposition” for any purpose of the

Internal Revenue Code (IRC). Therefore, dispositions include but are not limited to sales or exchanges, liquidations, redemptions,

gifts, transfers, etc.

Persons, whether U.S. or foreign, purchasing U.S. real property interests from foreign persons, certain purchasers' agents, and

settlement officers are generally required to withhold 10 percent of the amount realized on dispositions prior to February 17, 2016, and

withhold 15 percent on dispositions after February 16, 2016. The general rate has been increased from 10 percent to 15 percent due

to the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) which was signed into law on December 18, 2015. In most

transactions, the buyer or purchaser is the withholding agent. The buyer is required to determine if the seller is a foreign person or not.

If the buyer fails to withhold when the seller is a foreign person, the buyer may be liable for the tax required to be withheld.

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Transaction and Fact Pattern

Overview of Withholding under FIRPTA for Sales by Individuals

Diagram of Transaction Facts

 A foreign person (transferor) disposes, transfers, sells, etc. a

U.S. real property interest (USRPI) to either a U.S. person or a

foreign person.

 The buyer (transferee) of the USRPI is generally required under

FIRPTA to withhold an amount equal to 10 percent of the

amount realized by the transferor on dispositions prior to

February 17, 2016, and withhold 15 percent on dispositions after

February 16, 2016.

Effect on Tax

If there is any gain on the sale of USRPI by a foreign person, the

gain is considered effectively connected income. Therefore, the

foreign person is required to file a Form 1040NR and report the

gain which is taxable by the U.S. If the transferee does not

withhold as required, then the U.S. is relying on the foreign person

to file the Form 1040NR to report the gain and pay the tax due.

USRPI

Disposition of Property

Foreign Person

Disposes of

USRPI

(Transferor)

U.S. or Foreign

Person

Purchases USRPI

(Transferee)

Sales Proceeds

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U.S. or Foreign

Person Purchases

USRPI

(Transferee)

Summary of Potential Issues

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 1 Determine if the transferor is a foreign person.

Issue 2 Determine if the property disposed of is a U.S. real property interest.

Issue 3 Determine if the transferee properly withheld, filed appropriate forms and paid the tax withheld.

Issue 4 Determine if one of the exemptions to FIRPTA withholding applies.

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All Issues, Step 1: Initial Factual Development

Overview of Withholding under FIRPTA for Sales by Individuals

In general under FIRPTA, any person, whether a U.S. or foreign person, who acquires a USRPI from the seller who is a foreign person

must withhold a tax of 10 percent of the amount realized by the transferor on dispositions prior to February 17, 2016, and withhold 15

percent on dispositions after February 16, 2016.

Fact Element Resources

 Determine if a foreign person (transferor) disposes of an interest either in real property or an

entity that owns real property located in the U.S.

 Determine whether the real property disposed of by the transferor is a USRPI.

 Determine whether the interest in the U.S. entity which owns U.S. real property is a U.S.

real property holding corporation.

 Determine whether the transferee, who may be a U.S. person or a foreign person, is

required to withhold on the amount realized and if so, at which withholding rate.

 Determine whether the transferee withheld amounts and submitted the amounts withheld

within 20 days of the date of the disposition to the IRS by using Forms 8288 and 8288-A

and provided a copy of Form 8288-A to the transferor.

 IRS.gov - FIRPTA Withholding -

Withholding of Tax on Dispositions of

United States Real Property Interests

 IRC 897

 IRC 1445

 Treas. Reg. 1.1445-1

 IRC 897(c)

 IRM 4.61.12 - Foreign Investment in

Real Property Tax Act

 IRM 2.3.59 - Command Codes

BMFOL and BMFOR

 Form 8288

 Form 8288-A

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All Issues, Step 1: Initial Factual Development (cont’d)

Overview of Withholding under FIRPTA for Sales by Individuals

Fact Element Resources

 Determine status of transferor – foreign or U.S. person.

 Identify property disposed of including contracts, attachments, exhibits, addendums, etc.

 Determine steps of the transaction.

 Identify any exemptions for required withholding.

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Issue 1, Step 2: Review Potential Issues

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 1

Determine if the transferor is a foreign person.

Explanation of Issue Resources

The FIRPTA rules generally require a transferee to withhold on the amount realized when a

transferor who is a nonresident alien or a foreign corporation (foreign person) disposes a U.S.

real property interest unless there is an exemption. The first determination to be made is

whether the transferor is a foreign person.

A foreign person is defined for FIRPTA purposes to mean any person other than a United

States person. Additionally, a foreign person includes a foreign government.

A foreign person includes a nonresident alien which is defined as neither a U.S. citizen nor a

resident of the U.S.

A United States person is defined in the IRC to be U.S. citizens, resident aliens, U.S.

corporations, U.S. partnerships, U.S. estates and trusts. A resident alien is defined as 1) one

who has lawful permanent resident status (green card holder), 2) meets the substantial

presence test (183 day test), or 3) made a first year election to be taxed as U.S. resident. See

IRC 7701(b)(4).

A United States person also includes a nonresident alien who makes an election to be treated

as a resident of the United States under IRC 6013(g) or (h).

 IRC 897(a)

 IRC 1445(a)

 Treas. Reg. 1.897-9T(c)

 IRC 1445(f)(3)

 Treas. Reg. 1.897-9T(e)

 IRC 7701(b)(1)(B)

 IRC 7701(a)(30)

 IRC 7701(b)(1)(A)

 IRC 7701(b)(4)

 IRC 6013

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Issue 1, Step 3: Additional Factual Development

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 1

Fact Element Resources

Transferor is a foreign person, or not a:

 U.S. citizen

 Resident alien by meeting one of the following:

− Lawful permanent resident (green card holder)

− Substantial presence test

− First year election

− Election under IRC 6013(g) or (h)

 IRC 7701(b)(1)(A)

 IRC 7701(b)(1)(A)(i)

 Treas. Reg. 301.7701(b)-1(b)

 IRM 2.3.32 - Command Code

MFTRA

 IRM 5.1.18.13 - United States

Passport Office

 IRM 2.3.80 – Command Code

DDBKD

 IRC 7701(b)(1)(A)(ii)

 IRC 7701(b)(3)

 Treas. Reg. 301.7701(b)-1(c)

 IRM 2.3.51 - Command Code IMFOL

 IRM 2.3.35 - Command Code IRPTR

 Not a U.S. entity  IRC 7701(b)(1)(A)(III)

 IRC 7701(b)(4)

 IRC 6013

 IRC 7701(a)(30)(A)

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Issue 1, Step 4: Develop Arguments

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 1

Explanation of Adjustment Resources

The first fact to determine in the issue of whether FIRPTA withholding under IRC 1445 is

required is to verify that the transferor is a foreign person. This is done by confirming the

transferor, who is not a U.S. citizen, is also not a U.S. person. In most cases, this means the

foreign citizen is not a resident alien.

Therefore, the three tests should be applied to the facts of the transferor to confirm he/she is

not a resident alien. These tests are:

1) Lawful permanent resident (green card) test,

2) Substantial presence (183 day) test, and

3) The first year election test

 IRC 7701(b)(1)(A)

 IRC 7701(b)(3)

 IRC 7701(b)(4)

DECISION POINT: If the transferor is not a foreign person, FIRPTA does not apply and

withholding under IRC 1445 is not required.

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Issue 2, Step 2: Review Potential Issues

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 2

Determine if the property disposed of is a U.S. real property interest.

Explanation of Issue Resources

IRC 897(c) defines a U.S. real property interest as any interest in:

1) Real property located in the United States or the U.S. Virgin Islands including:

− Land and unsevered natural products of the land (crops, timber, mines, wells, etc.)

− Improvements (buildings or other permanent structures or components of either)

− Personal property (movable walls, furnishings, etc.) associated with use of the real

property

2) A domestic corporation that is a U.S. real property holding corporation (USRPHC) is a

U.S. corporation in which the fair market value of its USRPI equals or exceeds 50 percent

of the fair market value of the USRPI plus interests in real property outside the U.S. plus

any other assets used or held for use in the trade or business adjusting for all exceptions.

 IRC 897(c)

 Treas. Reg. 1.897-1

 Treas. Reg. 1.897-1(b)

 Treas. Reg. 1.897-2(b)

 Treas. Reg. 1.897-2(d)

Dispositions include but are not limited to:

 Sales or exchanges

 Liquidation or redemption

 Like kind exchanges under IRC 1031

 Involuntary conversions

 Gifts

 Treas. Reg. 1.897-1(g)

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Issue 2, Step 3: Additional Factual Development

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 2

Fact Element Resources

Verification of real property disposed of through internal and external databases including

Accurint:

 Review any Form 1099-S issued for the disposition by the transferor (Doc. Code 75)

 Review of Form 8288-A

 Review of Integrated Data Retrieval System (IDRS) command code Information Returns

Processing Transcript Request – Payee Online (IRPTRO) (Doc. Code 41)

 Review of sales contract and attachments and HUD statement

 Review of title documents

 Review of court documents (deeds)

 Review internet public records

 IRM 2.3.35 - Command Code IRPTR

Verification that interest in a domestic corporation is a USRPHC:

 Review of internal information for domestic corporation (books, records, tax returns)

 Review of other public information (internet)

 Third party contact with domestic corporation

 IRM 2.3 - IDRS Terminal Responses

 IRM 4.11.57 - Examining Officers

Guide (EOG), Third Party Contacts

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Issue 2, Step 4: Develop Arguments

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 2

Explanation of Adjustment Resources

Determining whether a nonresident alien disposes of a USRPI is a fact-intensive issue.

First, there must be a disposition of property. Typically, taxpayers will identify sales of their

property as dispositions on their tax returns but might not identify gifts, liquidations,

redemptions and foreclosures as dispositions.

 Treas. Reg. 1.897-1(g)

DECISION POINT: If there was a disposition, FIRPTA related withholding under IRC

1445 may be required. If not, FIRPTA related withholding does not apply.

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Issue 3, Step 2: Review Potential Issues

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 3

Determine if the transferee properly withheld, filed appropriate forms and paid the tax withheld.

Explanation of Issue Resources

IRC 1445 requires a transferee to withhold on the amount realized when a transferor who is a

foreign person disposes, transfers, sells, etc. a USRPI unless there is an exemption.

For dispositions of USRPI prior to February 17, 2016, a transferee is generally required to

withhold 10 percent of the amount realized.

For dispositions of a USRPI after February 16, 2016, a transferee is generally required to

withhold 15 percent of the amount realized, per the PATH Act change.

An exception to the 15 percent withholding rate for dispositions of USRPI after February 16,

2016, is when the amount realized is in excess of $300,000 but does not exceed $1,000,000

and the transferee is going to use the USRPI as a personal residence. Then the rate is 10

percent.

 IRC 1445

 Treas. Reg. 1.1445-1

 Treas. Reg. 1.1445-1(h)

 IRC 1445(c)(4)

 IRC 1445(b)(5)

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Issue 3, Step 2: Review Potential Issues (cont’d)

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 3

Explanation of Issue Resources

A transferee is required to report and pay the amount withheld within 20 days of the date of

the disposition by completing and filing a Form 8288 with the IRS. Attached to the Form 8288

is the Form 8288-A.

A transferee sends copies A and B of the Form 8288-A to the IRS with Form 8288 and keeps

copy C. The IRS stamps copy B of the Form 8288-A, if it is complete, and sends it to

transferor.

 IRC 1445

 Treas. Reg. 1.1445-1

 Treas. Reg. 1.1445-1(d)(1)

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Issue 3, Step 3: Additional Factual Development

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 3

Fact Element Resources

Verification of amount realized on sale:

 Review Form 1099-S

 Review IDRS command code IRPTRO – Doc. Code 75

 Review public records

 Review sales contract to ensure all assets noted

 Verify any additions to basis of the property disposed of

 IRM 2.3.35 - Command Code IRPTR

 Accurint

Verification of withholding:

 Review IDRS command code Information Returns Processing Transcript Request –

Selected Documents Payer Summary (IRPTRI) of transferee for Form 8288 (MFT 17)

 Review Form 8288 and Form 8288-A filed by transferee

 IRM 2.3.35 - Command Code IRPTR

 IRM 21.8.2.11 - Form 8288 and Form

8288-A

 CCA 201028040 - IRC 1445

Verification of filing by transferee:

 Review IDRS command code BMFOL “T” and “R” for Form 8288 (MFT 17) filed by

transferee

 Review IDRS command code IRPTRO of transferor for Form 8288-A (Doc. Code 41)

 IRM 2.3.59 – Command Code

BMFOL and BMFOR

 IRM 2.3.35 - Command Code IRPTR

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Issue 3, Step 4: Develop Arguments

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 3

Explanation of Adjustment Resources

If it is determined that the transferee did withhold under IRC 1445, it is imperative that the

amount realized on the sale of the USRPI is verified. This is to ensure that the correct amount

was withheld by the transferee. Review Forms 8288 and 8288-A to ensure correctness,

timeliness and completeness and determine the amount withheld was paid by the transferee

within 20 days of the date of the transaction.

If the transferee did not withhold, file Forms 8288 and 8288-A and pay the required tax to the

IRS, the transferee should be pursued for the appropriate amount which should have been

withheld. Transferee may request relief from penalties.

 IRS.gov - Reporting and Paying Tax

on U.S. Real Property Interests

 IRS.gov – FIRPTA Withholding -

Withholding of Tax on Dispositions of

United States Real Property Interests

 IRS.gov - ITIN Guidance for Foreign

Property Buyers/Sellers

 Rev. Proc. 2008-27 – Penalty Relief

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Issue 4, Step 2: Review Potential Issues

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 4

Determine if one of the exemptions to FIRPTA withholding applies.

Explanation of Issue Resources

IRC 1445 provides that a transferee is not required to withhold under IRC 1445(a) if the

transaction meets one of the following exemptions:

 Transferor furnishes nonforeign affidavit

 Non-publicly traded domestic corporation furnishes affidavit

 Transferee receives qualifying statement from IRS

 Amount realized does not exceed $300,000 on new residence of transferee

 USRPHC Stock sold is regularly traded on established markets

 Applicable wash sales transactions

 Transferor furnishes nonforeign affidavit to qualified substitute who furnishes it to transferee

 Exceptions for when affidavits are furnished

 IRC 1445(b)

 Treas. Reg. 1.1445-2

 Treas. Reg. 1.1445-3

 IRC 1445(b)(5)

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Issue 4, Step 3: Additional Factual Development

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 4

Fact Element Resources

 Transferor furnishes nonforeign affidavit

− Exception – transferee knows it to be false

 Nonpublicly traded U.S. corporation furnishes affidavit

− Exception – transferee knows it to be false

 Transferor furnishes nonforeign affidavit to qualified substitute who furnishes it to transferee

− Exception – transferee knows it to be false

 Treas. Reg. 1.1445-2(b)(2)

 Treas. Reg. 1.1445-2(b)(4)(iii)

 Treas. Reg. 1.1445-2(c)(3)

 Treas. Reg. 1.1445-2(c)(3)(ii)

 Treas. Reg. 1.1445-2(c)(3)

 Treas. Reg. 1-1445-2(b)(4)(iii)

 Transferee receives qualifying statement from IRS

 Amount realized from disposition does not exceed $300,000 on new residence of transferee

 Stock sold is regularly traded on established markets

 Applicable wash sales transactions

 Treas. Reg. 1.1445-3(a)

 Treas. Reg. 1.1445-2(d)

 IRC 1445(b)(5)

 Treas. Reg. 1.1445-2(c)(2)

 IRC 1445(b)(8)

 IRC 897(h)(5)

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Issue 4, Step 4: Develop Arguments

Overview of Withholding under FIRPTA for Sales by Individuals

Issue 4

Explanation of Adjustment Resources

Although a transferor, who appears to be a foreign person, disposes of a USRPI, there are

situations where the transferee is exempted from the required withholding under IRC 1445.

 IRS.gov - Exceptions from FIRPTA

Withholding

 Treas. Reg. 1.1445-2(b) thru (d)

 Treas. Reg. 1.1445-3(a)

DECISION POINT: In these situations, when either claimed by the transferee or

initiated by the IRS, verification and confirmation is required to ensure either the

transferee was correct in applying one of the exemptions or the IRS was correct in

determining one of the exemptions was allowable.

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Index of Referenced Resources

Overview of Withholding under FIRPTA for Sales by Individuals

IRC 897

IRC 1031

IRC 1445

IRC 6013

IRC 7701

Treas. Reg. 1.897-1

Treas. Reg. 1.897-2

Treas. Reg. 1.897-9T(c)

Treas. Reg. 1.1445-1

Treas. Reg. 1.1445-2

Treas. Reg. 1.1445-3

Treas. Reg. 301.7701(b)-1

Rev. Proc. 2008-27 - Penalty Relief

CCA 201028040 – IRC 1445

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Index of Referenced Resources (cont’d)

Overview of Withholding under FIRPTA for Sales by Individuals

IRM 2.3 - IDRS Terminal Responses

IRM 4.11.57 - Examining Officers Guide (EOG), Third Party Contacts

IRM 4.61.12 - Foreign Investment in Real Property Tax Act

IRM 5.1.18.13 - United States Passport Office

IRM 21.8.2.11 - Form 8288 and Form 8288-A

IRS.gov - Exceptions from FIRPTA Withholding

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

IRS.gov - ITIN Guidance for Foreign Property Buyers/Sellers

IRS.gov - Reporting and Paying Tax on U.S. Real Property Interests

Foreign Investment in Real Property Tax Act (FIRPTA) of 1980

Form 8288

Form 8288-A

Protecting Americans from Tax Hikes Act of 2015

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Training and Additional Resources

Overview of Withholding under FIRPTA for Sales by Individuals

Type of Resource Descriptions

Saba Meeting Sessions  IIC Withholding – 2012 Centra

 IIC Treaties and Jurisdiction to Tax – 2012 Centra

Reference Materials – Treaties  IRS.gov – International Tax Topics (FIRPTA)

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Glossary of Terms and Acronyms

Term/Acronym Definition

FIRPTA Foreign Investment in Real Property Tax Act of 1980

Foreign Person Any person other than a United States person

IDRS Integrated Data Retrieval System

IRPTRI Information Returns Processing Transcript Request – Selected Documents Payer Summary

IRPTRO Information Returns Processing Transcript Request – Payee Online Transcript

ITIN Individual Taxpayer Identification Number

Nonresident Alien Neither a U.S. citizen nor a resident of the U.S.

PATH Act Protecting Americans from Tax Hikes Act of 2015

Transferee Purchaser or buyer of USRPI

Transferor Seller of USRPI

United States

Person

U.S. citizens, resident aliens, U.S. corporations, U.S. partnerships, U.S. estates and trusts; includes a foreign

person who makes an election to be treated as a resident of the U.S. under IRC 6013(g) or (h)

USRPI U.S. real property interest

USRPHC U.S. real property holding corporation

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Index of Related Practice Units

Associated UILs Related Practice Unit DCN

9424.04 Taxation on the Disposition of USRPI by Foreign Persons RPW/C/08_04-01 (formerly

RPW/CU/P_08.4_05(2016)

9442.02 Verifying Refund Request of IRC 1445 Withholding on Dispositions of

U.S. Real Property Interests

WIT/P/15_02-02 (formerly

WIT/9442.02_02(2016))

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