The Foreign Investment in Real Property Tax Act (FIRPTA) requires foreign individuals to pay income tax on any gains from the sale of U.S. real property interests. FIRPTA covers individuals as well as foreign corporations, trusts, partnerships, and estates.

To file taxes, all taxpayers should have a Taxpayer Identification Number. For U.S. citizens, their Social Security number is their taxpayer identification number. Foreign nationals still have to pay taxes, but they don't have a Social Security number.

Individual Taxpayer Identification Numbers (ITINs) fill in the gap. Individuals who don't qualify for a Social Security number can apply for an ITIN. To obtain an ITIN, individuals must complete Form W-7, Application for IRS Individual Taxpayer Identification Number, or Form W-7SP.

ITINs and FIRPTA

The IRS states that all foreign sellers of U.S. real property interests should have a Taxpayer Identification Number (TIN). While a foreign national is not required to have an ITIN, having one gives them more options and flexibility when filing under FIRPTA.

For FIRPTA, taxpayers have two general options: to pay any required withholding or to request reduced tax withholding.

Individuals should make sure they have an ITIN before filing paperwork with the IRS. If Form W-7 or W-7SP is incomplete, the IRS will reject the form, and the foreign national will have to reapply for an ITIN. If the taxpayer is unable to resolve the rejection, this doesn't mean they aren't required to pay taxes.

When an individual doesn't have an ITIN, they cannot claim reduced withholding. Instead, they must file Form 8288 or Form 8288-A and pay the 10 percent tax.

If a taxpayer doesn't have an ITIN and owes money to the IRS, they must complete Form 8288 or 8288-A and send it to the IRS within the first two days of sale.

In comparison, when a taxpayer has an ITIN and wants reduced or eliminated withholding, they can file Form 8288-B. This form requires a TIN.

If you have questions about FIRPTA or other tax issues for foreign nationals, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.