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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. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. The tax withheld is 10% of the sales price unless a certificate has been processed that allows escrow to withhold a reduced amount.

For more information: http://www.irs.gov/businesses/small/international/article/0,,id=105000,00.html

Due to the complexities of the FIRPTA regulations, it is not the intent of this website to provide a complete discussion on FIRPTA, but the following information may be useful:

If you are a real estate professional representing a foreign person, at the time you acquire the sales listing, the first thing to ask is if they have a tax payer identification number (TIN). If escrow has to remit the 10% FIRPTA withholding without having a TIN, this usually has nightmare consequences for filing for refunds. If your client has been reporting taxes on form 1040NR, they probably already have a TIN. If they don’t have a TIN have them immediately apply for one by filing Form W-7, found at: http://www.irs.gov/pub/irs-pdf/fw7.pdf W-7 applications require original identification documents or officially certified identification documents be submitted and can take 4 to 6 weeks to be processed.

Hints for Foreign taxpayers doing a 1031 Exchange:

Unlike with HARPTA where a 1031 exchange automatically exempts the seller from withholding, FIRPTA gets withheld on a 1031 transaction unless a withholding certificate is obtained from the IRS that reduces or eliminates the required withholding. To obtain a withholding certificate, an application is made on form 8288-B. Because it can take up to 90 days to process the waiver request, the sale escrow may close before the waiver is processed. In this case, escrow will usually hold the funds for a certain period of time waiting for the waiver to return and will remit to the IRS if the waiver is not received in time. If a client is doing a 1031 exchange, generally it is best to wait for the waiver to be approved and the funds remitted from escrow to the 1031 facilitator before closing on the replacement property. If the replacement property closes escrow prior to the waiver being received, the tax payer will have taxable boot when they receive the refund from escrow of the FIRPTA that was exempted from withholding. If the tax payer must close on the replacement property prior to the waiver approval and has used their own funds in addition to the exchange proceeds to close the replacement, the taxable boot recognized when the FIRPTA is returned will be offset by the boot given by the tax payer. The tax payer is advised to seek the advice of their tax professional.