When a foreign person disposes of a US real property interest, it is usually facing the prospect of federal income tax withholding of 10% of the proceeds of such disposition. This is usually the largest adjustment to the selling price. However, there are exceptions from the FIRPTA withholding. Here are the top two:
If the acquirer will use the property as a home and the sales price (amount realized) is less than $300,000;
If the actual tax on capital gain is less than the amount withheld.
The first exception will require a written statement from the purchaser that he/she or a family member plans “to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant”1. Accordingly, even if the property will not be the primary residence of the purchaser, it can still be considered as a home for FIRPTA withholdings’ purposes, as long as the purchaser’s family members plan to reside in it for at least 50% of the number days that it will be used during the first two years following the purchase.
The second exception requires the filing of withholding certificates with the IRS and certain statements and computations to demonstrate that there is either no capital gain resulting from the transaction (after considering all purchase and selling costs) or that the tax on capital gain would not exceed the amount withheld. The FIRPTA withholding will still be made at closing and are placed in escrow by the closing agent, but it can be more quickly recovered (generally within two months of closing). Otherwise, the seller has to wait until the filing of a tax return the year following the closing to recover in part or in whole the amount withheld.
While the first exception is not necessarily within the control of the seller, the filing of the withholding certificates provides a much quicker way to recover the tax refund otherwise due.
Marc-Andre Boisseau, CPA