Withholding tax on disposal of US property for foreign investors
New for 2016
Non US persons (or non-resident aliens) who own US real property are subject to a federal withholding tax when the property is disposed. This includes investors as well as individuals owning property in the US for their own personal use. The withholding tax is known as FIRPTA withholding, which relates to the ‘Foreign Investment in Real Property Tax Act 1980’.
Key points to note about FIRPTA withholding are as follows:
- The rate of withholding is generally 15% of the gross proceeds or fair markert value of the property, which has risen from 10% withholding prior to 17 February 2016.
- A disposal subject to this tax will include gifts and transfers as well as traditional sales.
- If the disposal is of property own by US and non US persons together then the amount subject to withholding tax is the amount allocable to the US person only.
There are some circumstances in which FIRPTA withholding tax on the disposal of US property is not required or reduced, however reporting is still required. Some examples of these include:
- The disposal is of a primary residency and sold for less than $300,000;
- No proceeds are received for the property; or
- The amount to be withheld is greater than the maximum tax liability of the transferor.
How to obtain an exemption
An exemption from FIRPTA withholding tax is not automatic. To obtain the applicable reduced rate or full exemption a withholding certificate must be submitted to the IRS, along with a Form W7 ‘Individual Taxpayer Identification Number’ if an ITIN is not already held.
The non US person must notify the other parties to the transaction of the withholding certificate request either the day of the transaction or the day prior. The IRS will generally act on the withholding request within 90 days of the submission.
As acceptance agents Warrener Stewart can assist with the full process of applying for a withholding certificate to avoid the 15% tax withholding, including certifying documentation for the ITIN application, if necessary.
For more information about your personal situation please contact Warrener Stewart for a free initial consultation.