CAUTION: The following information concerns withholding requirements for foreign persons who own U.S. real property. These questions and answers are very general in nature and do not include all the variances and loopholes provided under the Internal Revenue Code and Regulations. This is a highly specialized area. We recommend our customers obtain additional information from an international tax attorney, immigration attorney or CPA specializing in international accounting.

What withholding requirements are imposed on foreign persons who own U.S. real property?

Usually, 30 percent of gross rents collected on behalf of a foreign owner and 10 percent of total amount realized on the sale of real property must be withheld and remitted to the IRS. However, exceptions may apply.

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What kinds of persons are subject to withholding on income from real property?

Nonresident aliens, meaning persons who are not a U.S. citizen or resident. This term includes nonresident aliens who are married to U.S. citizens or resident aliens; foreign corporations and partnerships; Puerto Rican residents; nonresident trustees, administrators or executors; foreign private foundations (though subject to a lower withholding rate); and foreign organizations that are tax-exempt under IRC 501(a) but which have unrelated business income.

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What kinds of persons are not subject to the withholding requirements?

The following persons are or may be exempt from the requirement:

A. U.S. citizens.

B. Resident aliens. An alien is considered a U.S. resident if he/she holds a “green card” (immigrant visa) or meets the substantial presence” test. To meet the substantial presence test, the person must be physically present in the U.S. on at least:

 (1) 31 days during the current calendar year, and

 (2) 183 days during the current year and the two preceding years, counting all the days of physical presence in the current year but only one-third the days present in the first preceding year and only one-sixth the days present in the second preceding year. However, days spent in the U.S. on F, J or M visas may not count. An international, international tax or immigration attorney should always be consulted to calculate whether or not the foreign person meets the substantial presence test.

C. Corporations created or organized under the laws of Guam, Northern Mariana Islands, Virgin Islands and American Samoa that meet certain conditions regarding stock ownership and gross income. If the conditions are not met, the corporation is subject to withholding.

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Who is responsible for withholding and remitting the taxes?

Any person who is in control of or responsible for the receipt, disposal, custody or payment of items of income subject to withholding is considered a withholding agent. This includes the real estate broker who collects rents or other moneys on a foreign owner’s behalf, or who acts as closing agent on the sale of property owned by a foreign person. If a person who is required to withhold taxes fails to do so, the person may be held liable for the amount of the tax.

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How are withheld amounts remitted to the IRS?

The withholding agent must deposit withheld amounts according to a strict schedule which varies with the amount of undeposited taxes. IRS Publication 515 contains an explanation of the withholding and remittance process. Obtain the publication by calling (800) 829-3676.

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What amount must be withheld on a foreign-owned rental property?

Persons who collect rent on behalf of a foreign property owner are required to withhold and remit to the IRS 30 percent of the gross rent collected. Bear in mind that a treaty with the country of the owner’s origin may alter the percentage, but 30 percent is the most common percentage.

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What is FIRPTA?

FIRPTA is the acronym for the Foreign Investment in Real Property Tax Act . Under FIRPTA, a buyer of property owned by a foreign person is required to deduct and withhold a tax equal to 10 percent of the amount realized by the foreign owner on the sale. This rule may differ when the seller is a foreign corporation. Usually, the closing agent, as the person responsible for handling the proceeds, takes care of the tax withholding and remittance, but the buyer is responsible to ensure the withholding is done.

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What exemptions apply to the FIRPTA withholding requirement?

Some of the exemptions most often encountered by real estate licensees are:

A. The seller, a nonforeign person, provides the buyer with an affidavit that meets the requirements of IRC Section 1445.

B. The seller realizes no more than $300,000 on the sale and the buyer acquires the property for use by him/her or his/her immediate family as a residence.

C. The seller provides the buyer with a qualifying statement from the IRS to the effect that reduced or no amount of withholding is required.

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