Withholding Rates and Special Rules

The standard Foreign Investment In Real Property Tax Act (FIRPTA) withholding rate is 15% of the amount realized. However, there are specific rules and exceptions:

Lower Withholding for Residential Properties Below $1 Million

 

• If the buyer intends to use the property as a **residence** and the purchase price is $300,000 or less, no withholding is required.
• For properties priced between $300,001 and $1 million, the withholding rate drops to 10%, provided the buyer intends to use the property as a residence.
• The buyer must occupy the property for at least 50% of the time it is in use during the first two years post-purchase.

Foreign Corporations

If a foreign corporation distributes a USRPI, it must withhold 21% of the gain recognized on the distribution.

Domestic Corporations

A domestic corporation must withhold 15% of the FMV of property distributed to a foreign shareholder if the shareholder’s interest qualifies as a USRPI.

Multiple Owners

If the property has multiple owners, the withholding applies only to the foreign seller’s share, based on their capital contribution.

Practical Example Suppose you purchase a $2 million commercial property from a foreign seller. The amount realized includes:

• $1.8 million in cash,
• $200,000 in assumed liabilities.

The total amount realized is $2 million. As the buyer, you must withhold 15% of $2 million, or $300,000, and remit it to the IRS using Form 8288 and Form 8288-A within 20 days of the transfer.

If the seller applies for a withholding certificate and the IRS approves a reduced withholding of $100,000, you would remit only that amount.