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FIRPTA Withholding Tax Regime Sec. 1445 -Paul Dailey, CPA, MBA

FIRPTA Withholding Tax Regime Sec. 1445 -Paul Dailey, CPA, MBA. The enforcement mechanism regarding the FIRPTA Tax imposed pursuant to Sec. 897 General Rule – 10% W/T of the amount realized by the seller – transferor W/T burden imposed upon purchaser-transferee Amount realized – Includes

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FIRPTA Withholding Tax Regime Sec. 1445 -Paul Dailey, CPA, MBA

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  1. FIRPTA Withholding Tax Regime Sec. 1445-Paul Dailey, CPA, MBA

  2. The enforcement mechanism regarding the FIRPTA Tax imposed pursuant to Sec. 897 • General Rule – 10% W/T of the amount realized by the seller – transferor • W/T burden imposed upon purchaser-transferee • Amount realized – Includes • Cash • FMV of other property • Liabilities assumed by purchaser Or to which USRPI is subject to • Triggerred only if seller is foreign person – Includes • NRA individual • Foreign Corp. (that has not made an (i) election to be treated as a domestic corporation for FIRPTA purposes) • Foreign Partnership • Foreign Trust

  3. W/T obligation is merely treated as an advance payment toward the foreign transferor’s ultimate U.S. tax liability – Does not relieve transferor of filing obligation in the U.S. (i.e. Forms 1040 NR or 1120 F) • Coordination with Sec. 1441 in the case of Sec. 301 distributions – Could be a dividend piece and then non-dividend portion subject to 10% W/T • Can W/T solely under 1441 OR • W/T under 1441 and 1445, respectively

  4. BUT, Sec. 1446 Controls in the case of a disposition of a USRPI by a domestic partnership • Disposition of partnership interest Considered USRPI if 50% or > of the partnership assets are USRPI’s AND 90% or > of its assets consists of USRPI’s, cash, and cash equivalents THEN applicable portion of the partnership will be considered as a USRPI – BUT, W/T on full amount of purchase price • Disposition of REIT interests • N/A if domestically controlled (defined as a foreign persons own 50% or > of its stock, by value, directly or indirectly – 5yr. Holding period) • If not, then W/T will apply if the stock constitutes a USRPHC • Distributions by Domestic Corporations • W/T applies when domestic corp. ( including a foreign corp. with an (i) election), that is a USRPHC, distributes property to a foreign shareholder • Applies to distributions pursuant to Sec. 302, in liquidation, or pursuant to Sec. 301 which is not made out of earnings and profits

  5. Distributions by foreign corporations BUT only if the property is a USRPI • Status of distributee (i.e. domestic or foreign) is irrelevant • MUST W/T 35% of recognized gain (FMV of USRPI > foreign corp’s tax basis) • In effect, foreign corp. is withholding to pay its own tax • Distributions by domestic or foreign partnerships Currently, no W/T is required by reason of the distribution itself • Distribution by REIT – W/T 35% of capital gain dividend distributions to foreign persons

  6. Exceptions to FIRPTA W/T • NO amounts realized (i.e. gift of unencumbered property) • Seller’s certification of non-foreign status – Can determine seller’s status by other means BUT certificate provides safe harbor regarding W/T, interest, and penalties if seller is later found to be a foreign person • Transferred property must be a USRPI Interests in Corps. That was a USRPHC within 5yrs. prior to a disposition Could be a USRPI – Certifying statement typically issued to transferor • Nonrecognitiontransactions • Any presence of boot that triggers some income recognition results in full W/T

  7. W/T Certificate that allows reduced or zero W/T- Pre-approval • Seller’s maximum tax liability from the disposition is < amount being W/T • Special appeal wherein IRS is persuaded that reduced W/T will not jeopardize the collection of tax • Fgn. government • Tax treaty exemption • Adequate security • Installment Sales • Residence Purchase – Subject to FIRPTA, but no W/T may apply • Purchaser’s use • MUST be individual • Amount realized cannot exceed $300,000

  8. USRPI • Real Property Interest – Real Property • Land unsevered natural products • Improvements (including buildings + structures) • Personal property associated with the use of real property • USRPHC – any corp. in which FMV of its USRPI’s equals or exceeds 50% of the sum of the FMV of its • USRPI’s • Foreign RPI’s • Other assets used or held for use in a trade or business 25% alternative Book Value determination – Determination dates – Last day of taxable year + date of each transaction that could cause USRPHC status – Alternative monthly determination dates

  9. Foreign Corps that made a Sec. 897 (i) election • Publicly traded partnership held by a 5% owner Interest in Real Property consists of fee ownership, co- ownership, leasehold, and options. Includes any direct or indirect right to share in the appreciation in value of real property – Extremely, broad definition – Does not include interest solely as a creditor.

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