EVETTE DAVIS: I see it's the top of the hour. And for those of you just joining us, welcome totoday's webinar, Foreign Investment in Real Property Tax Act or FIRPTA. We're glad you'rejoining us today. My name is Evette Davis and I am a Stakeholder Liaison with the InternalRevenue Service. And I will be your moderator for today's webinar, which is slated for 75minutes. Before we begin, if there is anyone in the audience that is with the media, please sendan email to the address on the slide. Be sure to include your contact information and the newspublication you're with. Our media relations and Stakeholder Liaison staff will assist you andanswer any questions you may have. As a reminder, this webinar will be recorded and posted to theIRS Video Portal in a few weeks. This portal is located at the www.irsvideos.gov. Please note,continuing education credits or certificates of completion are not offered if you view anarchived version of our webinars on the IRS Video Portal. 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Now this is very important folks, please do not enter anysensitive or taxpayer specific information in that ask questions box. Again, welcome. And thankyou for joining us. Let me make sure you're in the right place. Today, our Large Business andInternational Division will share information related to the Foreign Investment in Real PropertyTax Act, also referred to as FIRPTA, it's kind of like say, FIRPTA. This webinar is scheduledfor approximately 75 minutes. Let me introduce today's speakers, Bob Driscoll is a manager in theWithholding and International Individual Compliance group in our Large Business and InternationalDivision. Joining Bob are two international revenue agents, Andy Daxon and Chris Galanto. Andwith that, let's begin our discussion. Hey, Bob. I think I'll turn it over to you. BOBDRISCOLL: Thank you, Evette. And welcome everyone. Today, we're going to cover several topicsrelated to FIRPTA. We'll go over the general withholding requirements under FIRPTA. Identifythe basic transaction subject to FIRPTA, define U.S. real property interest, identify the FIRPTAwithholding forms. And lastly, we'll point out some resources you can find on IRS.gov. First,let's review the elements of a typical FIRPTA transaction. There are three necessary components,a disposition, a seller transfer or who is a foreign person, and a U.S. real property interestbeing disposed of. In a simple FIRPTA transaction, the foreign seller and a buyer agree on asales price for the U.S. real estate. The USRPI pictured above. Examples of real estate includea home, a condo, land, a commercial building. On the day of closing, the buyer receives thereal estate, but the seller doesn't get 100 percent of the agreed sales price. Instead, thebuyer withholds 15 percent from the sales price sends the withheld tax to the IRS. So theforeign seller only gets 85 percent of the agreed sales price at closing. This is the base caseFIRPTA scenario. There are many possible withholding scenarios in a FIRPTA transaction that wewill explain today. And now I'll turn it over to Chris to describe in much more detail thethree components of a FIRPTA transaction. CHRIS GALANTO: Thank you, Bob. So, first, let's definea foreign person. A foreign person is a non-resident alien, essentially an individual who is anon-U.S. citizen, is not a green card holder, and is not a resident under the substantialpresence test or can also be a foreign corporation incorporated outside the U.S. to be a foreignpartnership set up under non-U.S. laws. It could be a foreign trust, a trust not meeting boththe court and control test. It could be a foreign estate, or any other person that is not a U.S.
person as defined in Section 7701. Second, you have a disposition. A disposition is defined forFIRPTA purposes as any disposition for any purpose of the code including sales or exchanges,liquidations and redemption. Section 1031 like-kind exchanges, involuntary conversion, gifts,et cetera. This was may be found in Treasury regulation 1.897-1G. Third and lastly, a U.S. realproperty interest is any ownership interest other than an interest as a creditor, in realproperty or in a domestic corporation that is a U.S. real property holding corporation.
Additionally, for withholding purposes, an interest in a partnership is considered a USRPI if 50percent or more of the value of the gross partnership assets are USRPIs and 90 percent or moreof the value of gross partnership assets consist of USRPI, cash and cash equivalents. Types ofownership include the ownership, co-ownership, lease hold, timeshare, life estates, remainders,reversionary, and certain production payments described in Section 636. These may be found inTreasury Regulation 1.897-1(d)(2)(i). Real property can be put into three categories, one, landand unsevered products of land; two, improvements to the land; and three, personal propertyassociated with the real property. A U.S. real property holding corporation is a domesticcorporation that has U.S. real property interest and the fair market value of those USRPIs are 50percent or more of the fair market value of the USRPIs plus fair market value of a foreign ownedreal estate, plus fair market value of business assets owned by the corporation. Now, let's lookat the withholding requirement. Generally when a foreign person disposes of a U.S. real propertyinterest, the buyer or transferee is required to withhold 15 percent of the amount realized.
From 1980 until 2015, the general withholding rate was 10 percent of the amount realized. InDecember of 2015, the PATH Act was passed, which increased the general rate of withholding to 15percent for those transactions that occurred 60 or more days after the date the PATH Act wasenacted. That date was December 18, 2015. The PATH Act reduced the rate of withholding to 10percent on dispositions of USRPIs that are used as residences by the buyers where the amountrealized is greater than $300,000 but no more than $1 million. This can be, this can also befound in Treasury Regulation 1.1445-1(b)(2). A foreign corporation is generally required towithhold 21 percent of the gain recognized on the distribution of a USRPI to a foreign or U.S.
person. For informational purposes, entities such as Real Estate Investment Trusts are generallyrequired to withhold 21 percent of distributions attributable to gains from USRPIs. Note thatwithholding on the disposition of a USRPI held by a partnership, whether domestic or foreign,with foreign partners is accomplished under IRC 1446. Since the disposition is considered to beECI, Effectively Connected Income, the gain or loss is included in the computation of thepartnership's effectively connected income and withheld upon under IRC 1446 and reported on Form8804 and 8805. So this slide shows a typical real estate transaction to which FIRPTA is subjectto and the flow of funds and services formed by the parties involved. You have a buyer, aclosing agent and a seller. The buyer or buyer's bank transfer the proceeds to the closingagent who assists in settling the transaction by providing certain services for the transaction.
In the closing agent's normal function, they collect and distribute the money, prepare requiredforms including Form 8288 and 8288-A, if the seller is identified as a foreign person through thedocuments provided to the closing agent by the seller or by the seller's real estate agent. Ifthe seller is determined to be a foreign person, the closing agent withholds the required amountof FIRPTA withholding from the sales proceeds and places it in escrow. It completes the Form8288 and 8288-A for the buyer. It provides them to the buyer for the buyer's signature and mailsthe forms and the tax withheld to the IRS on behalf of the buyers. Evette, can we stop here for apolling question? DAVIS: We sure can, Chris. OK, audience our first polling question isgenerally, IRC 1445(a) requires what percentage of withholding on the amount realized ondispositions of USRPI or U.S. Real Property Interests? Is the correct answer, A, 21 percent?
B, 10 percent? C, 30 percent? Or D, 15 percent? Take a moment, think about what Chris justtalked to us about. And click the radio button that best answers this question. I'll give youjust a few more seconds to make your selection. And I'll begin the countdown now, 5, 4, 3, 2 and1. OK, so we're going to close the polling now, and we'll share the correct answer on the nextslide. And the correct response is D, 15 percent. Now, what the, what percentage of you got thisone correct? OK, so it looks like 79 percent got this correct, Chris, can you kind of go backand just kind of explain to the audience why the correct answer is 15 percent? GALANTO: Sure, ifyou remember the PATH Act of 2015 increased the general rate to 15 percent from 10 percent. Sonow, the correct answer for the general percentage is 15 percent. DAVIS: Aha. So we got toremember the change from that PATH Act. OK, awesome, awesome. All right, Chris, I think I'mgoing to stick with you for the next slide. Got it? GALANTO: Yes, thanks, Evette. As providedearlier, the buyer or transferee is generally required to withhold 15 percent of the amountrealized on the disposition of USRPI. The amount withheld is generally due to the IRS within 20days of the date of the disposition or transfer. The buyer or transferee uses the Form 8288,which is titled U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. RealProperty Interests, to report the amount realized and the tax withheld to the IRS. The buyer ortransferee also complete copies A, B and C of the Form 8288-A, the Form 8288-A is the statementprovided to the seller or transferor showing the disposition, amount realized, and tax withheld.
The buyer or transferee is required to file the Form 8288 copies A and B of Form 8288-A with thepayment for the amount withheld with IRS and generally within 20 days of the date ofdisposition. The IRS processes the Form 8288, the payment of withholding and Copy A of the Form8288-A. If all the required information is reported on Form 8288-A, copy B ofthe Form 8288-A is stamped by the IRS and sent to the seller or transferor. If all of therequired information is not contained on Form 8288-A, the IRS will try to contact the seller whoobtained the missing information. If the missing information is not provided, a stamped Copy B ofForm 8288 is not sent to the seller. In certain situations, the buyer or transferee, the selleror transferor or other authorized person may request a Certificate of Withholding from the IRSfor a reduced rate of withholding or even eliminate withholding all together on the dispositionof the USRPI. In certain situations, this request is made on Form 8288-B. As noted at the bottomof the slide, a TIN is required for the buyer or transferee and the seller or transferor. If thebuyer or seller is a non-resident alien individual who is required to have a TIN but it's noteligible to attain an SSN, you must apply for IRS Individual Taxpayer Identification Number or anITIN. If you do not have a TIN and are eligible for an ITIN, you can apply for an ITIN byattaching the completed Form 8288-B to a completed Form W-7 and forwarding the package to the IRSat the address given in the form W-7 instruction. Get Form W-7 the application for IRSIndividual Taxpayer Identification Number for more information. So, who is required to file theFIRPTA forms under the law? The Form 8288 which is the withholding tax return for a FIRPTAtransaction is required to be filed by the withholding agent, which is the buyer or transferee.
Code section 1445 and the related regulations provide that the buyer or transfer is thewithholding agent. Additionally, the directions for the Form 8288 specifically provide that theparty's name, address and identifying numbers that should be entered on line one and part one, asthe party responsible for withholding is the buyer or other transferee responsible forwithholding under Section 1445(a). Do not enter the name, address, an identifying number of atitle company, mortgage company, etcetera, unless it happens to be the actual buyer ortransferee. The Form 8288-A is the information returned for the FIRPTA transaction and should beattached to the Form 8288 once filed. As with the Form 8288 the withholding agent needs to be,the withholding agent information needs to be properly completed. That is the buyer ortransferee should be listed as the withholding agent, not the closing agent who is involved inthe transaction. A Form 8288-B or withholding certificate request may be filed by either thebuyer or transferee, the seller or transferor, or a designated representative. The informationregarding the buyer or transferee and the seller or transferor should be properly completed onthe form. Again, unless a closing agent happens to be the actual buyer or transferee theclosing agent should not be listed as the partner responsible for withholding. As provided in thelast slide, the Form 8288 and the Form 8288-A are required to be filed by the buyer ortransferee, who is the withholding agent under law. However, these forms are also completed bywithholding agents involved in the transaction as a courtesy for the buyer or transferee who isthe withholding agent. When this occurs, the Form 8288 and 8288-A have to be completedcorrectly to the proper party is identified as the withholding agent. That is the partyresponsible for withholding. This party is the buyer or transferee not the closing agent who iscompleting the forms as a courtesy for the buyer or transferee. The directions for the Form 8288specifically provide that the party's name, address, and identifying number that should beentered on line one in part one as the party responsible for withholding is the buyer or othertransferee responsible for withholding under Section 1445(a). Do not enter the name, address,and identifying number of a title company, mortgage company, etcetera unless it happens to be theactual buyer or transferee. As the buyer or transferee, the seller or transferor or a designatedrepresentative may file the Form 8288-B for particular transaction. It is important that theinformation regarding the buyer or transferee and the seller or transferor be properlycompleted. That is, unless the closing agent happens to be the actual buyer or transferee or theseller or transferor, the closing agent should not be listed as the party responsible forwithholding. Now I'll turn it over to Andy to discuss withholding certificates. ANDY DAXON:Thanks, Chris. Well, Chris just mentioned the Form 8288-B, this form is one way to request awithholding certificate. A withholding certificate as a document provided by the IRS thatcontains the IRS' approval for reduced or eliminated withholding under Section 1445. Awithholding certificate generally may be issued by the IRS in cases where reduced withholding isappropriate. Where the seller is exempt from U.S. tax or an agreement for the payment of thetax is entered into with the IRS. A withholding certificate that is obtained prior to a transfernotifies the buyer that reduced withholding is required or that no withholding is required atall. The withholding certificate that is obtained after a transfer has been made may authorize anormal refund or an early refund. As Chris mentioned earlier, a buyer, a seller or anauthorized agent may request the withholding certificate. Here, you can see a list of somereferences for information on withholding certificate. In addition to the instructions of theForm 8288-B, the references include the 1445 regulations, specifically the dash 3 and 6 regs,Revenue Procedure 2000-35, which provides the detailed process for the application andPublication 515, which provides additional detail to taxpayers on the application process. When awithholding certificate is applied for, the reason for the application is required to fall intoone of six category. Categories 1, 2, and 3 are contained on Form 8288-B on line 7a, 7b and 7crespectively. And these include Category 1, which are applications that claim that the seller isentitled to a non-recognition treatment or is exempt from tax. A non-recognition example wouldinclude a like-kind exchange transaction subject to Section 1031, an exemption example mayinclude the seller being an integral part of, or a controlled entity of a foreign government orthe seller is entitled to a treaty exemption. Category 2, applications are based solely on thecalculation that the seller's maximum tax liability. That is that the seller's maximum taxliability owed for the year is less than the tax required to be withheld under Section 1445 onthe disposition. Category 3, these are applications for withholding certificates under thespecial installment sale rules. Generally, the buyer is required to fully satisfy thewithholding obligation based on the amount realized. However, when the applicant supplies thecomputation as described under category 2 earlier, the gain under the installment method canresult in reduced withholding. Additional requirements are listed in Revenue Procedure 2000-35.
Now the other three categories are not listed on the From 8288-B and require a statement to beprepared and provided to the IRS. Again, take a look at revenue procedure 2000-35. And thosethree categories are Category 4, which are applications for withholding based on an agreementfor the payment of the tax. The following information should be included in the application toestablish the seller's maximum tax liability, or the amount otherwise required to be withheld.
And these include a signed copy of the agreement proposed by the applicant. And two, a copy ofthe security instrument proposed by the applicant. Category 5, which are applications for blanketwithholding certificate, a statement to the effect that a blanket withholding certificate is ineffect which excuses withholding with respect to multiple dispositions of property interests bythe seller during a period of no more than 12 months, it should be noted that only a seller mayrequest a withholding certificate using Category 5. And Category 6, which are applications forwithholding certificates based on any other basis. For this category, the same informationrequired for Category 4 must be included, along with a description of the non-conforming securityand a memorandum of law and facts establishing that the proposed security is valid andenforceable and adequately protects the government's interest. After receiving a request forreduced or eliminated withholding under Section 1445, the IRS is required to provide a responsewithin 90 days of the receipt of the application as to whether to grant or deny the request.
This however, depends upon whether the Form 8288-B or statement contains not only the requiredinformation, but enough information so that the determination may be paid as to whether a reducedor eliminated withholding amount is applicable. If the application is complete, and there'senough information provided, so a determination may be made, the IRS may reduce the withholdingrequired, may eliminate withholding all together or may deny the application. If the IRS allowsreduced withholding or eliminates the withholding, a withholding certificate will be issued tothe requestor and the withholding agent, and the withholding agent will be notified. If the IRSdenies the request for a withholding certificate, the IRS will notify the requestor by sendingLetter 3313 informing them the application has been denied. The IRS will also send Letter 3316 tothe withholding agent to notify them that the request for withholding certificate was denied andthat the withholding agent is required to file the Form 8288, 8288-A and remit to the IRS therequired withholding. If the IRS does not receive the Forms 8288 and 8288-A and the payment ofthe withholding within 90 days, the IRS sends the withholding agent the Letter 3543 requestingthe information again. If the forms and tax is not received within the next 90 days from thedate of the letter 3543, the withholding agent may be referred for examination. And theseprocedures are detailed in IRS Section 21.8.5.4.10. If the application is not complete, or thatthere's not enough information for a determination to be made, the IRS may request additionalinformation from the requestor or deny the request. If the Form 8288-B, where the application iscomplete, and the IRS issues a withholding certificate or a denial letter to the requestor andnotifies withholding agent prior to or on the date of the disposition, the following shouldoccur. The withholding agent withholds based upon the amount determined in the withholdingcertificate. If the withholding is reduced to zero, the withholding agent is not required towithhold at closing, and therefore, it's not required to file the Forms 8288 and 8288-A. Ifthey're withholding is reduced, but not eliminated, the withholding agent withhold using theamount designated in the withholding certificate, remits the tax withheld to the IRS with theForms 8288 and 8288-A and a copy of the withholding certificate by the 20th day after the date ofthe disposition. If the withholding certificate is denied, withholding agent withholds at thestatutory rate and remits the tax withheld to the IRS with the Forms 8288 and 8288-A. If thewithholding certificate or denial letter are not issued prior to or on the day of thedisposition, the withholding agent withholds at the required statutory rate at closing and holdsa tax in escrow until the IRS rules on the application. Again, if the IRS rules that thewithholding should be eliminated, no Forms 8288 or 8288-A are required to be filed by thewithholding agent and the tax withheld at closing is refunded to the seller. If the IRS ruleswithholding should be reduced, the withholding agent files the Forms 8288 attaching Form 8288-Aand a copy of the withholding certificate with the IRS and remits the required withholding notedon the withholding certificate to the IRS by the 20th day after the date of the withholdingcertificate. The closing agent then reimburses the seller for the difference between theoriginal tax withheld at closing and the tax noted on the withholding certificate and submittedto the IRS. If the IRS rules the application is denied, the withholding agent files the Form 8288attaching the Form 8288-A and the denial letter too with the IRS and remits the required taxwithheld for the 20th day after the date of the denial letter. We will now hear from Bob aboutsome common mistakes made on the Forms 8288, 8288-A, Bob. DRISCOLL: Thanks, Andy. Here are someof the common mistakes we see with respect to Forms 8288 and 8288-A. First, incomplete orinaccurate buyer information, maybe entering the closing agents TIN or name in place of the buyeror not including a copy of the withholding certificate when IRS has agreed to a lowerwithholding rate. Without complete and correct information IRS cannot post returns or tax to thecorrect taxpayer account. The closing agent is just performing its normal duties to assist inclosing the transaction. It almost never acts as a true agent for either buyer or seller.
Therefore, only the buyer's information should be included in the withholding agent section.
Third, filing the Forms 8288 and 8288-A, but not remitting the required withholding tax. In thiscase, IRS must contact the buyer and IRS not allowing the seller to claim the withheld tax as acredit against its tax. Here are some additional common mistakes we have seen, either sending inthe required withholding with no Forms 8288 and 8288-A or with only the Form 8288-A. This leadsto the IRS not be being able to post the withholding to the correct withholding agents account.
Second, not filing the Forms and remitting the required tax to be withheld after receiving adenial letter from the IRS with respect to a withholding certificate. Now let's look at some ofthe common mistakes we see with Form 8288-B. As with Forms 8288 and 8288-A, submitting Form8288-B with incomplete or inaccurate buyer information. We often see the closing agent'sinformation reported in the withholding agent section. This causes issues when either therequest is denied, or even when a reduced amount of withholding is allowed, but the form has thewrong TIN. Second, requester's not providing enough information so that a determination may bemade. Third, requester's not providing additional information timely when requested. If you fewmore common mistakes we see with Form 8288-B. One, closing companies refunding amounts withheldor closing to the seller prior to receiving a withholding certificate. And two, listing theclosing agent as both withholding agent and buyer. Let's look more closely at Form 8288-B. Line1, enter the sellers name, street address and TIN. If there is co-ownership with multiplesellers of the same property, attach additional sheets giving the required information for eachseller for Section 1445(e) withholding transactions. Enter the required information for eachforeign person for whom you are requesting reduced withholding. And there must be a TIN for eachseller. Line 2, enter the buyer's name street address and TIN, If there are multiple buyers,attach additional sheets giving the required information about each one. Do not enter theclosing agents on Line 2. Line 4a, enter the name of the withholding agent. The withholdingagent will almost always be the buyer. For distributions under Section 1445(a), the withholdingagent could be a trustee, executor or other authorized person. Line 4b, if the buyer has anagent, usually an attorney in the buyer's agent applies for the withholding certificate on behalfof the buyer, the buyer's agent enters its TIN here. Otherwise, enter the buyers TIN. Evette, Ithink this is a great time to pause for our second polling question. What do you think? DAVIS:Thanks, Bob. Yes, I think you're correct. Hey, folks, so here's our second polling question.
What form is required to be filed to reduce or eliminate withholding on distributions byforeign person of U.S. real property interest? Is it, A, Form 8288-B? B, Form W-8BEN-E? C,Form 8288-A or D, Form 8804-C? All right folks, just take a moment look at the question. I'llgive you just a few more moments to look over it, a few seconds to make your selection. And I'llstart the countdown now 5, 4, 3, 2, 1. OK, let's get 100 percent guys. OK, we're going to stopthe polling now. And we'll share the correct answer on the next slide. And the correct answer isA, Form 8288-B. Let's see what percentage of you responded correctly? Oh, man. OK, 63 percentof you responded correctly to that. Now, Andy, I know you talked in more detail about this or Bob.
Can one of you kind of give us an explanation as to why From 8288-B is the correct answer?
DAXON: Yes, A is the correct answer. The Form is titled application for withholdingcertificate. The other three forms are not in any way an application. So again, remember thatif you're using it as referred to in Revenue Procedure 2000-35, there are six categories forwhich a taxpayer can apply for the withholding certificate. The withholding certificate ofcourse is used to reduce or eliminate withholding at the time of disposition. So for the firstthree categories, which are the most common, you want to use this Form 8288-B. For Categories 4,5 and 6, you simply have the taxpayer send in a document that outlines all the information thatis similar to the information spelled out on the 8288-B in order to apply for that reduced orelimination of withholding. DAVIS: Right, great. Thank you so much. Thank you, thank you forthe explanation. OK, Bob, I'm going to turn it over to you. It looks like you're going to talkabout the need for a transferor's TIN, is that correct? DRISCOLL: That's correct, Evette. Ifthe seller does not have a TIN or if the seller does not provide the buyer's TIN, the buyer ispayment. Buyer should mail, everything to the address shown in the Where to File section of the still required to complete Forms 8288 and 8288-A and mail the forms along with any requiredForm 8288 instructions. If Forms 8288 and 8288-A do not contain the sellers TIN, the IRS willattempt to contact the seller to obtain the seller's TIN. IRS will not send a stamp copy a Form8288-A to the seller when IRS doesn't have the seller's TIN. When the seller goes to file hisincome tax return, the seller will not get credit for the tax withheld because there wasn't anIRS stamped copy of the Form 8288-A attached to the return. For non-resident alien individual NRAwho is not eligible for a Social Security Number, the NRA must obtain an Individual TaxpayerIdentification Number, or ITIN. Now if the buyer is a non-resident alien does not have an SSN oran ITIN, the buyer should still complete the Forms 8288 and 8288-A and mail the forms along withany payment to the address shown in the Where to File section of the Form 8288 instructions.
Additionally, the buyer should mail in a separate package, a completed Form W-7 application forIRS Individual Taxpayer Identification Number with the required supporting documentation andcopies of the Forms 8288 and 8288-A to the address given in the Form W-7 instructions. Now let'sdiscuss one more additional form that comes into play when real estate is disposed of. Form1099-S, Proceeds from Real Estate Transactions. Up to this point, we have stressed that anyclosing agent information name, address, TIN, etcetera should never appear on Forms 8288 or8288-A or on the check that is mailed into the IRS. Well Form 1099-S is different. Generally,the person responsible for closing or settling the transaction is required to file Form 1099-Swith the IRS. Therefore, the closing agent's information should appear in the boxes where thegreen arrows point to. Those titled Filer's Name, address etcetera and filer's TIN. What typesof transactions are reported on Form 1099-S? They include transactions consisting in whole or inpart of the sale or exchange for money, indebtedness, property, or services of any present orfuture ownership interest in one, improved or unimproved land, including air space. Two,inherently permanent structures including any residential, commercial or industrial building.
Three, a condominium unit and its appurtenant fixtures and common elements including land.
Four, Stock in a cooperative housing corporation, as defined in IRC 216; and five, anynon-contingent interest in standing timber. A sale or exchange includes any transaction properlytreated as a sale or exchange for federal income tax purposes. Even if the transaction is notcurrently taxable, for example, a sale of a main home may be a reportable sale, even though thetransfer may be entitled to exclude the gain under Section 121. The yellow highlighted area ofthe form is box 5 which we, Check here if the transferor is a foreign person, non-resident alienforeign partnership foreign state or foreign trust. If the seller is one of these foreignpersons, the box that the red arrow is pointing to should be checked. Again, for purposes of thisform a foreign person includes a non-resident alien, a foreign partnership, a foreign state or aforeign trust. Chris went into more detail on the different types of foreign persons earlier inthe presentation. So, what are the seller's responsibilities? Section 897 treats the dispositionof a USRPI by a foreign person as effectively connected income regardless of whether the selleris engaged in a U.S. trade or business. Therefore, the seller is required to file an income taxreturn as the seller is determined to be engaged in a trade or business in the U.S. even whendisposition results in a loss. For a non-resident alien, they would file a Form 1040-NR, U.S.
Non-resident Alien Income Tax Return and report the disposition on Schedule D and/or Form 4797 asrequired. If the seller received the IRS stamp Copy B of the Form 8288-A, the seller attaches itto the Form 1040-NR, and reports the withholding reported on the form. If the seller does nothave the IRS stamp Copy B of Form 8288-A, seller may attach the copy of the buyer provided, andthe closing statement from the disposition and any additional records to show withholdingactually took place closing. Andy is going to walk you through an example. Andy ? DAXON :Thanks, Bob. So let's review an example of a FIRPTA disposition that hopefully brings theseideas all together. So here we have FP seller who is a foreign citizen and resident of Chile,and a foreign person for U.S. tax purposes under the code. So on October 31 2019, FP sellerenters into an agreement to sell her condominium in Miami, WA Buyer for $1.5 million. FP sellerhas a basis of $1.4 million in the condominium. On November 1, 2019, FP seller files Form 8288-Bwith the IRS claiming her tax liability is going to be less than the 15 percent withholdingrequired on the $1.5 million but not realized, and that withholding is $225,000. The sellerprovides copies of the Form 8288-B to both the buyer and to the closing agent. The sellerprojected her gain on the disposition to be $100,000 based upon the amount realized again of$1.5 million and her adjusted basis of $1.4 million and projected the tax on the disposition tobe $25,000. The seller provided she has no other U.S. source, effectively connected income ornon-effectively connected income for 2019. On November 15, 2019, the sale of FP seller'scondominium closed with the help of closing agent LLC. Closing agent LLC withholds the $225,000which is the 15 percent of the $1.5 million sales price or amount realized at closing as requiredunder Section 1445. On January 29, 2020, the IRS allows the reduced withholding amount of$25,000 and mails the withholding certificate to FP seller and WA Buyer. On February 10, of 2020closing agent LLC prepares Forms 8288 and 8288-A for seller reporting WA Buyer as thewithholding agent and reports withholding of $25,000 and WA Buyer signed the Form 8288 as awithholding agent. February 16 of 2020, closing agent LLC mails the Forms 8288, 8288-A, a copy ofthe withholding certificate and payment of $25,000 to the IRS on behalf of WA buyer and issuesFP seller the remaining $200,000 of tax withholding that was held in escrow at closing. On March15, closing agent LLC files Form 1099-S for the sale of the condominium. On June 15 of 2020, FPseller files her 2019 Form 1040-NR reporting $100,000 gain the $25,000 of tax on that gain andthe $25,000 of withholding and attaches Copy B of the Form 8288-A she received from the IRS. Sonow let's look at the forms that are required to be filed based upon the information provided inthis example. First, we look at the Form 8288-B. The seller knew her total tax liability wasgoing to be far less than the statutory withholding required under Section 1445 on the $1.5million amount realized or sale price on the disposition of the condo. She did not want to waituntil the subsequent year to receive a refund of the tax over withheld. So she requested awithholding certificate using the Form 8288-B. Again, as discussed earlier, it is extremelyimportant that area 4 of the form contains the withholding agent's information and not theclosing agent or title company etcetera's information unless they are acting solely on behalf ofthe buyer or are the actual buyer themselves. Generally again as Bob provided earlier, thewithholding agent is the buyer. Again, it is important to provide a complete and accurate Form8288-B, as well as attaching any additional information so that a determination may be made withrespect to the request for a withholding certificate. If the form is not complete and accurate,this will lead to delays in the IRS determination within the 90-day period whether thewithholding certificate should be granted or not. As provided here, the seller reported theamount realized of $1.5 million and adjusted basis of $1.4 million and claimed her total maximumtax liability for 2019 year is going to be less than the required withholding under Section 1445by checking box 7b which as provided earlier corresponds to a Category 2 request. Here we see asample withholding certificate that would have been issued to FP seller, our taxpayer. The mostimportant information on the certificate includes first, the date of the withholding certificatewhich is highlighted in yellow. As this will determine the due date of the Form's 8288 and 8288-Aif they required to be filed. Again, if it is determined that no tax us due, the Forms 8288 and8288-A are not required to be filed. The second is the amount of withholding which is highlightedin the blueish/green color. In this case it shows $25,000. This is the amount that thewithholding agent is required to submit to the IRS with the Forms 8288 and 8288-A prior to the20th day of the date after the date of the withholding certificate. Here you see the Form 8288due based upon the withholding certificate we just looked at. Again, the form should becompleted accurately with the buyer's information. As you see here, the total amount withheld is$25,000 which is reported here on box 6. The Form 8288-A is required to be filed with the Form8288. Again, ensure that the correct information is used for the withholding agent. Here yousee that the Form 8288-A reports the $25,000 of withholding required to be withheld for thewithholding certificate and is shown on the Form 8288. Here we see the form 1099-S that Bob talkedabout, and that would have been filed for the disposition of the Miami condominium. Please notebox 6 which was added to Form 1099-S for the years 2017 and forward. This helps identify whetherthe seller as a foreign person or not. In this case, it is checked as FP seller, a citizen andresident of Chile. As the disposition of the U.S. Real Property Interest is consideredeffectively connected income, the seller is required to file an income tax return and report thedisposition. In this case, the gain of $100,000 is eventually reported on Line 14 of the Form1040-NR, whether it was initially reported on Form 4797, Schedule D or both. Here we see thesecond page of the Form 1040-NR. Note that the seller reported the gain and the tax due on thegain. In this case the tax due again is $25,000. The seller also reported the amount withheldand the disposition that was shown on the stamped Copy B of the Form 8288-A provided to theseller by the IRS. Again, note that if the stamped Copy B of the Form 8288-A provided by the IRSis not attached to the Form 1040-NR, there may be issues and delays with the IRS allowing thewithholding claim. So, it is important to have all the seller's information including TIN orTaxpayer Identification Number on the Form 8288 and 8288-A when the forms are filed with the IRS.
That concludes the example and I think we may have time for another polling question. Evette,do we have another polling question? DAVIS: Why, yes, we do, Andy . OK, audience, our thirdpolling question is, which of the following is a common mistake on the Forms 8288 and Form8288-A? Is it, A, incomplete or inaccurate information for the buyer or transferee? Is it B,withholding tax payments not sent with Form 8288? Is it C, not filing forms after withholdingcertificate request is denied? Or D, all of the above? OK, folks, we can get 100 percent on thisand just take a moment, review the questions, think about it, I believe Bob is the one who gaveus some common mistakes that were made. And click the radio button that best answers thisquestion. I'll give you just a few more seconds to make your final selection, and we'll countdown and 5, 4, 3, 2, 1. OK, we're going to stop the polling now. And let's share the correctanswer on the next slide. OK, and the correct answer or response is D, all of the above. Nowlet's see what percentage of you responded correctly. Whoa, all right, we're up to 94 percent.
This is awesome, folks, awesome. Thanks so much, Andy , Bob, Chris , you guys are rocking it.
Now, Chris , I'll turn it over to you. GALANTO: OK, thanks, Evette. Now, you're going to gothrough some of our frequently asked questions. All these questions and more can be found onIRS.gov by searching FIRPTA. So the first frequently asked question we see here talks about whentwo spouses jointly dispose of a USRPI can the U.S. spouse report 100 percent of the sale whilethe foreign spouse reports 0 percent of the sale in order to avoid FIRPTA withholding. And nope,they cannot do that. Each spouse would have to report their portion of the sale and thereforethe foreign spouse would be subject to FIRPTA withholding on their portion. Since it is jointlyowned, it would be 50/50 split between the two spouses. This FAQ also addresses when the sellersare not related and there are multiple foreign sellers. The withholding has to be allocatedamong the foreign sellers. Failure of the foreign sellers to provide an allocation of thewithholding by the 10th day from the date of transfer, the buyer will have to divide thewithholding evenly among the foreign sellers. Our second FAQ is about when a disposition happensin one year, but the date of disposition on the Form 8288-A is the subsequent year. Thisgenerally happens when a withholding certificate request was filed, but the IRS did not make adetermination until the subsequent year. So what year would the seller report the sale on theirincome tax return? The seller or transferor should always, always report the sale on theirincome tax return in the year of the disposition. Now I'll turn it over, Bob for the next twofrequently asked questions. DAVIS: Bob, are you there? Are you still on mute, Bob? DRISCOLL:Thanks, Chris . The third FAQ asks, when a foreign person assigns the rights to purchase aUSRPI to a third person before the contract's closing date, is that subject to withholding underFIRPTA? Yes, the amount realized for the sale of the rights to purchase a USRPI is subject towithholding under FIRPTA. In the example a foreign person sold their rights to purchase as USRPIfor $30,000 to another individual. The buyer would be required to withhold 15 percent on the$30,000 and remit to the IRS on Form 8288 and 8288-A. The fourth FAQ, how is it determined that aUSRPI will be used as a personal residence and therefore have a reduced rate of withholding orbe exempt from withholding based on the amount realized? The buyer or buyers have to determinewhether they have definite plans to reside at the property for at least 50 percent of the daysthe property is used by anyone during the first two 12 month periods following the transfer date.
Vacant days are not taken into account in this calculation. Days that brothers, sisters,spouses, ancestors, lineal descendants, reside at the property count in the calculation. I willnow turn it back to Chris to discuss our next two FAQs. GALANTO : Hey, thanks, Bob. So ourfifth FAQ is related to our last question and talks about, how can a seller be sure that nowithholding will be done when the disposition is exempt from tax, as the amount realized is under$300,000 and the buyer was used the property as a personal residence? So the seller should makesure that all the parties are well informed. This includes making sure that the buyer andclosing agent are aware of the exception and that the buyer informs the closing agent that theyplan to use it as a personal residence. Our sixth FAQ is, how can seller living outside the U.S.
ensure their withholding certificate is provided timely by the IRS to their closing company?
This can be done by putting the closing company's information in Box 5 of the Form 8288-B, asthis will have the IRS send the correspondence regarding the withholding certificate to theclosing company. Now, Bob will take us through our last FAQ. DRISCOLL: Thanks, Chris . Our lastFAQ is, how long does the IRS have to act on a withholding certificate if the seller has toapply for an ITIN with the withholding certificate? Typically, IRS will act on a withholdingcertificate application within 90 days of receipt, assuming all necessary information wasprovided. The ITIN is processed within 10 days of receipt normally. It is important when a FormW-7 is submitted for an ITIN that a completed Form 8288-B is included with the package. See theinstructions to Form W-7 for more information. Evette, do we have time for one more pollingquestion? DAVIS: Why? Yes, we do, Bob . Thank you so much. OK, audience, we're in thehomestretch and our final polling question is, you have foreign seller A realizing $250,000 on aproperty sale to buyer B. Buyer B plans to use the property as their primary residence. SoBuyer B is required to withhold the following amount under IRC 1445(a)? Is the answer, A,$25,000? B, zero dollars? C, $37,500? Or D, $52,500? Think about what was just said, take amoment and click the radio button that best answers this question. We had some great examplesand they talked about this particular question in that example. So I'll give you just a fewmore seconds to make your final selection. And the countdown begins now, 5, 4, 3, 2, 1. OK,we're going to stop the polling now. And let's share the correct answer on the next slide. And Isee the correct response is B, zero. Now let's see what percentage of you responded correctly tothis question. OK, Bob, looks like we got 51 percent responding correctly to this question.
Can you just kind of tell them why the answer is zero? Bob or Chris . DRISCOLL: Yes, yes,Evette. This was explained back on FAQ four. And remember these FAQs are on IRS.gov. The buyeror buyers have to determine whether they have definite plans to reside at the property for atleast 50 percent of the days, the property is used by anyone either within or without the familyduring the first two 12-month periods following the transfer date. Vacant days when no one isoccupying the property are taken into account in the calculation. You take into account daysthat your brothers or sisters, spouses, fathers and mothers, lineal descendants do reside at theproperty. And that's how you make the determination and you have something, you should writesomething, I would suggest that you write something down on a piece of paper to document how youcame up with those calculations. And that's how you would show those and to be able to documentthat, that you actually used that as a residence along these guidelines. DAVIS: OK, so it lookslike in that particular question, primary residence is the key term that they're looking atoverall, OK. Good stuff. OK, Bob, it looks like you have some resources you want to share withour attendees, is that correct? DRISCOLL: I do, Evette. The first one is Publication 515Withholding of Tax on Non-resident Aliens and Foreign Entities. Secondly, Publication 519, theU.S. Tax Guide for Aliens. And on IRS.gov under the International Taxpayers section, I wouldrecommend in the search box when you get to IRS.gov, type in FIRPTA withholding, and that willbring you to the relevant pages on the information that we've been discussing in this webinar. OnIRS.gov, you will also find Practice Units that have been developed by LB&I Technical Specialistson different topics related to FIRPTA withholding. Evette, that's all we have. I'll turn itback over to you. DAVIS: Thanks so much again, Bob. OK, hello again, folks. It's me, EvetteDavis, and I'll be moderating the Q&A session. Before we start on the Q&A session, I do want tothank everyone for attending today's presentation on Foreign Investment in Real Property TaxAct, which is FIRPTA. Earlier I mentioned that I do want to know what questions you have for ourpresenters. Here is your opportunity. If you haven't put questions in, there's still time so goahead and click on the drop-down arrow next to the Ask Question field and type in your question,then click Send. Fortunately, Bob, Chris and Andy are staying on with us to answer yourquestion. One thing before we start, we may not have time to answer all the questions submitted.
However, let me assure you we will answer as many as time will allow. If you're participatingto earn a certificate and related continuing education credits, you will qualify for one creditby participating for at least 50 minutes from the official start of the webinar which means thefirst few minutes of chatting before the top of the hour does not count towards that 50 minutes.
Now let's go ahead and get started so that we can get in as many questions as possible. Allright, so the first question that we have, I'm going to go to you, Bob, when is the 10 percentwithholding rate applicable on dispositions? DRISCOLL: Yes, Evette. The 10 percent rate came inwith the PATH Act. And it applies to dispositions under 1445(a) usually where there's directownership of the USRPI and the foreign person sells that interest. The 10 percent rate cameinto effect for dispositions occurring after February 16, 2016. That's when that new 10 percentrate came into effect. And it applies to residences, properties that the buyer uses a residenceand the amount realized is greater than $300,000 but no more than $1 million. So it's in betweenthere for the, the under $300,000, as we just discussed just recently in the webinar, if that'sthe amount realized there will be no withholding when the property is going to be used as aresidence when you get to $300,001 up to $1 million, the withholding rate is 10 percent. DAVIS:OK, that was one of those questions, great. Thank you so much, Bob. OK, Chris , let me go toyou. May a non-resident alien exclude any gain on the disposition of a U.S. real propertyinterest under IRC 121? GALANTO: Thanks, Evette. Yes, a non-resident alien is eligible toexclude any gain under IRC 121 as long as they meet the required eligibility test, the NRA couldalso request a withholding certificate from the IRS to reduce the withholding if they areentitled to an IRC 121 exclusion. DAVIS: Awesome. OK, thank you so much for that explanation,Chris . OK, Andy , looks like it's your turn. Let me pick on you for a moment. Is FIRPTAwithholding applicable if the buyer and the seller are non-resident alien? DAXON: Sure, Evette.
The answer to this question is, yes. As Chris provided earlier, the components of a FIRPTAtransaction which generally require withholding under Section 1445. Are one, a seller who's aforeign person, two a disposition and three, a U.S. real property interest being disposed of.
Therefore, if a foreign person disposes of a U.S. real property interest withholding underSection 1445 is generally required. Withholding under Section 1445 does not depend upon whetherthe buyer is a U.S. person or a foreign person. So, therefore, there is no exception orexemption to withholding if the buyer is a foreign person. DAVIS: Wow, OK. Good stuff, goodstuff. OK. Thank you so much. OK, let me go back to Bob. This one is for you. Let's see. Itsays, is there a requirement to withhold even if it is known that the seller will have a loss onthe disposition of the U.S. Real Property interest? Is there a requirement to withhold?
DRISCOLL: Evette, under Section 1445, there is no automatic exemption from withholding if theseller expects to have a loss on the disposition. When there is no automatic exemption fromwithholding, the buyer is still required to withhold tax at the statutory rate on the amountrealized. In order to reduce the amount withheld at closing, the seller would have to file arequest for a withholding certificate on Form 8288-B, which would probably file, would fall underCategory 2 in this case, it requests that the withholding amount be reduced or eliminated. DAVIS:Wow, OK. Thank you for that explanation, Bob. I really appreciate it. Oh my goodness, thistime has gone by so fast, folks. OK, audience and I am so sorry but that's all the time we havefor questions. And I want to take a moment to thank Bob, Chris , and Andy , for a great webinar,for sharing their knowledge and their expertise and for answering some of your questions. Butbefore we close the Q&A session, Bob, what key points do you want the attendees to remember fromtoday's webinar? DRISCOLL: Yes, Evette. Here are some takeaways we want you to remember aftertoday's FIRPTA webinar. When does FIRPTA apply? It applies when a foreign person sells U.S.
real estate. The buyer is required to withhold 15 percent from the sales price. There areexceptions that reduce the withholding rate. Taxpayers can also apply to IRS for a withholdingcertificate to reduce or eliminate the FIRPTA withholding. Second point, if you are the buyer,you are required to file Forms 8288 and 8288-A and pay the withholding tax to IRS within 20 daysof the closing. Even if the closing company is helping you to complete the forms and send in thepayment, you, the buyer are responsible to make sure everything is filed and paid correctly. Twomore final points, if you plan to apply for a withholding certificate to reduce or eliminateFIRPTA withholding tax. First, make sure that all information on Form 8288-B is correct andthat the form includes the TIN for both the buyer and the seller. And finally, make sure that anyinformation on lines 4a through 4b is the buyer's information. No information about the closingagent should appear on the Form 8288-B or any other FIRPTA form that you send to IRS. Thank you,Evette, and back and back to you. DAVIS: Thanks so much, Bob. OK, audience we are planningadditional webinars throughout the year. To register for an upcoming webinar, please visitIRS.gov keywords, search Webinars, and select the Webinars for Tax Practitioners or Webinars forSmall Businesses. And when appropriate, we will be offering certificates and CE credit forupcoming webinars. So we invite you to visit our video portal at www.irsvideos.gov. There youcan view archived versions of our webinars. Now continuing education credits or certificates ofcompletion are not offered if you view an archived version of any of our webinars on the IRAVideo Portal. Again, a big thank you to our speakers for a great webinar, for sharing theirexpertise and answering your questions, and I also want to thank you, our attendees, forattending today's webinar. If you attended today's webinar for at least 50 minutes from theofficial start time of the webinar, you will qualify for one possible CE credit. Again, the timewe spent chatting before the webinar started does not count toward those 50 minutes. If you areeligible for continuing education from the IRS and you registered with your valid PTIN, yourcredit will be posted to your PTIN account. If you're eligible for continuing education fromCalifornia Tax Education Council, your credit will be posted to your CTEC account as well. Also,if you're registered through the Florida Institute of CPAs, your participation will be provideddirectly to them. If you qualify and have not received your certificate and or credit byOctober 1, please email at CL.SL.Web.Conference.Team@IRS.gov. The email address is also shown onthe slide as well. So if you're interested in finding your local Stakeholder Liaison, you maysend us an email using that same address shown on this slide. And we will send you theirinformation. We would appreciate if you take just a few minutes to complete a short evaluationbefore you exit. And if you'd like to have more sessions like this one, let us know. If youhave thoughts on how we can make them better, please let us know that as well. If you haverequests for future topics on webinars, or pertinent information that you'd like to see in an IRSFact Sheet or Tax Tip or FAQ, on IRS.gov then please include that suggestion in the commentssection of the survey. Click the survey button on your screen to begin if it doesn't come up,then make sure you disabled your pop up blocker. It's been a pleasure to be with you here today.
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