When the seller of a U.S. real property interest is a foreign national, the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) applies to the sale and determines applicable taxes. In general, any sale that falls under FIRPTA requires withholding of 10 or 15 percent of the gains from the sale.

Even if a property sells at a loss, in general, the buyer must still withhold 10 or 15 percent of the sale price. For example, a buyer purchases a foreign national's interest in a farm for $100,000. The sale falls into the 15 percent category, and the buyer must withhold $15,000 of the sale price. This is the case even though the foreign national realized a $25,000 loss on the sale.

Withholding isn't the same as the tax a foreign national will pay. It's similar to a refundable deposit, and FIRPTA applies because the IRS doesn't automatically know that the property was sold at a loss.

In general, sales that are a loss qualify for one of the FIRPTA's exceptions. To get the exception, however, the foreign national must provide documentation showing the loss.

Just as a U.S. citizen has to report losses in property transactions to the IRS, foreign national taxpayers must also report a loss. Filing a tax return is the only way to get the withheld amount from the IRS. By planning ahead, however, foreign nationals may be able to reduce the withheld amount.

Withholding

One way that foreign nationals can avoid or reduce withholding, especially when they know or expect a U.S. real property interest to sell at a loss, is by getting a withholding certificate from the IRS. By documenting the expected loss ahead of the sale, they can reduce the amount withheld.

Certificates can take months to receive, meaning that taxpayers need to plan well in advance of any sale. If a foreign national waits until the property sells, they will likely not have the certification in time for closing.

If you have questions about FIRPTA, 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.