Publication 515 |
2000 Tax Year |
The disposition of a U.S. real property interest by a foreign
person (the transferor) is subject to income tax withholding. The
transferee is the withholding agent. As the transferee, you must
deduct and withhold a tax equal to 10% (or other amount) of the total
amount realized on the disposition (i.e., 10% of the purchase price).
You must find out if the transferor is a foreign person. If the
transferor is a foreign person and you fail to withhold, you may be
held liable for the tax.
A foreign person is a nonresident alien individual,
foreign corporation that has not made an election under section 897(i)
of the Internal Revenue Code to be treated as a domestic corporation,
foreign partnership, foreign trust, or foreign estate. It does not
include a resident alien individual.
The term transferor means any foreign person that
disposes of a U.S. real property interest by sale, exchange, gift, or
any other transfer. A transfer includes distributions to
shareholders of a corporation, partners of a partnership, and
beneficiaries of a trust or estate.
The term transferee means any person, foreign or
domestic, that acquires a U.S. real property interest by purchase,
exchange, gift, or any other transfer.
The amount realized by the transferor is the sum of:
- The cash paid, or to be paid (principal only),
- The fair market value of other property transferred, or to
be transferred, and
- The amount of any liability assumed by the transferee or to
which the property is subject immediately before and after the
transfer.
The term U.S. real property interest means an interest,
other than as a creditor, in real property (including an interest in a
mine, well, or other natural deposit) located in the United States or
the Virgin Islands, as well as certain personal property that is
associated with the use of real property (such as farming machinery).
It also means any interest, other than as a creditor, in any domestic
corporation unless it is established that the corporation was at no
time a U.S. real property holding corporation during the shorter of
the period during which the interest was held, or the 5-year period
ending on the date of disposition. If on the date of disposition, the
corporation did not hold any U.S. real property interests, and all the
interests held at any time during the shorter of the applicable
periods were disposed of in transactions in which the full amount of
any gain was recognized, then an interest in the corporation is not a
U.S. real property interest.
Corporations, partnerships, trusts, and estates.
Withholding is required on certain distributions and other
transactions by domestic or foreign corporations, partnerships,
trusts, and estates.
A foreign corporation that distributes a U.S. real property
interest must withhold a tax equal to 35% of the gain it recognizes on
the distribution to its shareholders.
A domestic corporation must withhold a tax equal to 10% of the fair
market value of the property distributed to a foreign person if:
- The foreign person's interest in the corporation is a U.S.
real property interest, and
- The property distributed is either in redemption of stock or
in liquidation of the corporation.
Distributions from a domestic corporation that is a U.S. real
property holding corporation (USRPHC) is generally subject to NRA
withholding and withholding under the U.S. real property interest
provisions. This also applies to a corporation that was a USRPHC at
any time during the shorter of the period during which the U.S. real
property interest was held, or the 5-year period ending on the date of
disposition. A USRPHC can satisfy both withholding provisions if it
withholds under one of the following procedures.
- Apply NRA withholding on the full amount of the
distribution, whether or not any portion of the distribution
represents a return of basis or capital gain. If a reduced tax rate
applies under an income tax treaty, then the rate of withholding must
not be less than 10%, unless the treaty specifies a lower rate for
distributions from a USRPHC.
- Apply NRA withholding to the portion of the distribution
that the USRPHC estimates is a dividend. Then, withhold 10% on the
remainder of the distribution (or on a smaller amount if a withholding
certificate is obtained and the amount of the distribution that is a
return of capital is established).
The same procedure must be used for all distributions made
during the year. A different procedure may be used each year.
If a domestic partnership that is not publicly traded disposes of a
U.S. real property interest at a gain, the gain is treated as
effectively connected income and is subject to the rules explained
earlier under Partnership Withholding on Effectively Connected
Income.
A publicly traded partnership that disposes of a U.S. real property
interest must withhold tax on distributions to foreign partners,
unless it elects to withhold based on effectively connected taxable
income allocable to foreign partners as discussed earlier under
Publicly Traded Partnerships.
You are a withholding agent if you are a trustee, fiduciary, or
executor of a trust or estate having one or more foreign
beneficiaries. You must establish a U.S. real property interest
account. You enter in the account all gains and losses realized during
the taxable year of the trust or estate from dispositions of U.S. real
property interests. You must withhold 35% on any distribution to a
foreign beneficiary that is attributable to the balance in the real
property interest account on the day of the distribution. A
distribution from a trust or estate to a beneficiary (foreign or
domestic) will be treated as attributable first to any balance in the
U.S. real property interest account and then to other amounts.
A trust with more than 100 beneficiaries may elect to withhold from
each distribution 35% of the amount attributable to the foreign
beneficiary's proportionate share of the current balance of the
trust's real property interest account. This election does not apply
to publicly traded trusts or real estate investment trusts (REITs).
For more information about this election, see section
1.1445-5(c) of the regulations.
Publicly traded trusts and REITs must withhold on distributions of
U.S. real property interests to foreign persons. The withholding rate
is 35%. For more information, see section 1.1445-8 of the
regulations.
Additional information. For additional information on
the withholding rules that apply to corporations, trusts, estates, and
REITs, see section 1445 of the Internal Revenue Code and the related
regulations. For additional information on the withholding rules that
apply to partnerships, see the previous discussion.
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You may also write to the
Internal Revenue Service Center
P.O. Box 21086
Drop Point 8731 FIRPTA Unit
Philadelphia, PA 19114-0586.
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Exceptions.
You do not have to withhold if any of the following apply.
- You (the transferee) acquire the property for use as a home
and the amount realized (sales price) is not more than $300,000. You
or a member of your family must have definite plans to reside at the
property for at least 50% of the number of days the property is used
by any person during each of the first two 12-month periods following
the date of transfer. When counting the number of days the property is
used, do not count the days the property will be vacant.
- The property disposed of (other than certain dispositions of
nonpublicly traded interests) is an interest in a domestic corporation
if any class of stock of the corporation is regularly traded on an
established securities market. However, if the class of stock had been
held by a foreign person who beneficially owned more than 5% of the
fair market value of that class at any time during the previous 5-year
period, then that interest is a U.S. real property interest if the
corporation qualifies as a USRPHC, and you must withhold on it.
- The disposition is of an interest in a domestic corporation
and that corporation furnishes you a certification stating, under
penalties of perjury, that the interest is not a U.S. real property
interest. Generally, the corporation can make this certification only
if the corporation was not a USRPHC during the previous 5 years (or,
if shorter, the period the interest was held by its present owner), or
as of the date of disposition, the interest in the corporation is not
a U.S. real property interest by reason of section 897(c)(1)(B) of the
Internal Revenue Code. The certification must be dated not more than
30 days before the date of transfer.
- The transferor gives you a certification stating, under
penalties of perjury, that the transferor is not a foreign person and
containing the transferor's name, U.S. taxpayer identification number,
and home address (or office address, in the case of an entity).
- You receive a withholding certificate from the Internal
Revenue Service that excuses withholding. See Withholding
Certificates, later.
- The transferor gives you written notice that no recognition
of any gain or loss on the transfer is required because of a
nonrecognition provision in the Internal Revenue Code or a provision
in a U.S. tax treaty. You must file a copy of the notice by the 20th
day after the date of transfer with the Internal Revenue Service
Center, P.O. Box 21086, Drop Point 8731 FIRPTA Unit, Philadelphia, PA
19114-0586.
- The amount the transferor realizes on the transfer of a U.S.
real property interest is zero.
- The property is acquired by the United States, a U.S. state
or possession, a political subdivision, or the District of
Columbia.
- The grantor realizes an amount on the grant or lapse of an
option to acquire a U.S. real property interest. However, you must
withhold on the sale, exchange, or exercise of that option.
- The disposition (other than certain dispositions of
nonpublicly traded interests) is of publicly traded partnerships or
trusts. However, if an interest in a publicly traded partnership or
trust was owned by a foreign person with a greater than 5% interest at
any time during the previous 5-year period, then that interest is a
U.S. real property interest if the partnership or trust would
otherwise qualify as a USRPHC if it were a corporation, and you must
withhold on it.
Certifications.
The certifications in items (3) and (4) are not effective if you
have actual knowledge, or receive a notice from an agent, that they
are false. If you are required by regulations to furnish a copy of the
certification to the IRS and you fail to do so in the time and manner
prescribed, the certifications are not effective.
Liability of agents.
If you receive either of the certifications discussed in item (3)
or (4) and the transferor's agent or your agent (the transferee's
agent) has actual knowledge that the certification is false, or in the
case of (3), that the corporation is a foreign corporation, the agent
must notify you, or the agent will be held liable for the tax. The
agent's liability is limited to the amount of compensation the agent
gets from the transaction.
An agent is any person who represents the transferor or transferee
in any negotiation with another person (or another person's agent)
relating to the transaction, or in settling the transaction. A person
is not treated as an agent if the person only performs one or more of
the following acts related to the transaction:
- Receipt and disbursement of any part of the
consideration,
- Recording of any document,
- Typing, copying, and other clerical tasks,
- Obtaining title insurance reports and reports concerning the
condition of the property, or
- Transmitting documents between the parties.
Reporting and
Paying the Tax
Transferees must use Forms 8288 and 8288-A to report and pay
to the IRS any tax withheld on the acquisition of U.S. real property
interests. These forms must also be used by corporations,
partnerships, estates, and trusts that must withhold tax on
distributions and other transactions involving U.S. real property
interests.
For partnerships disposing of U.S. real property interests, the
manner of reporting and paying over the tax withheld is the same as
discussed earlier under Partnership Withholding on Effectively
Connected Income.
For publicly traded trusts and real estate investment trusts, you
must use Forms 1042 and 1042-S for reporting and paying over tax
withheld on distributions from dispositions of U.S. real property
interests. Use Income Codes 24, 25, and 26 on Form 1042-S for
transactions involving these entities.
Form 8288,
U.S. Withholding Tax Return for Dispositions by Foreign
Persons of U.S. Real Property Interests. The tax withheld on the
acquisition of a U.S. real property interest from a foreign person is
reported and paid using Form 8288. Form 8288 also serves as the
transmittal form for copies A and B of Form 8288-A,
Statement of Withholding on Dispositions by Foreign Persons of
U.S. Real Property Interests.
Generally, you must file Form 8288 by the 20th day after the date
of the transfer.
If an application for a withholding certificate (discussed later)
is submitted to the IRS before or on the date of a transfer and on the
date of transfer the application is still pending with the IRS, the
correct withholding tax must be withheld, but does not have to be
reported and paid over immediately. The amount withheld (or lesser
amount as determined by the IRS) must be reported and paid over within
20 days following the day on which a copy of the withholding
certificate or notice of denial is mailed by the IRS.
If the principal purpose of applying for a withholding certificate
is to delay paying over the withheld tax to the IRS, the transferee
will be subject to interest and penalties. The interest and penalties
will be assessed for the period beginning on the 21st day after the
date of transfer and ending on the day the payment is made.
Form 8288-A.
Each transferor or distributee must be notified of the amount of
withholding tax paid to the IRS. Form 8288-A is used for this
purpose. Attach copies A and B to Form 8288. IRS will stamp Copy B and
send it to the person subject to withholding. Keep Copy C for your
records.
Form 1099-S,
Proceeds From Real Estate Transactions. Generally, the
real estate broker or other person responsible for closing the
transaction must report the sale of the property to the IRS using Form
1099-S. For more information about Form 1099-S, see the
Instructions for Form 1099-S and the General
Instructions for Forms 1099, 1098, 5498, and W-2G.
Withholding Certificates
The amount that must be withheld from the disposition of a U.S.
real property interest can be adjusted pursuant to a withholding
certificate issued by the IRS. The transferee, the transferee's agent,
or the transferor may request a withholding certificate. The IRS will
generally act on these requests within 90 days after receipt of a
complete application.
A withholding certificate may be issued due to:
- A determination by the IRS that reduced withholding is
appropriate because either:
- The amount that must be withheld would be more than the
transferor's maximum tax liability, or
- Withholding of the reduced amount would not jeopardize
collection of the tax,
- The exemption from U.S. tax of all gain realized by the
transferor, or
- An agreement for the payment of tax providing security for
the tax liability, entered into by the transferee or
transferor.
Categories.
All applications for withholding certificates are divided into six
basic categories. This categorizing provides for specific information
that is needed to process the applications. The six categories are:
- Applications based on a claim that the transfer is entitled
to nonrecognition treatment or is exempt from tax,
- Applications based solely on a calculation of the
transferor's maximum tax liability,
- Applications under special installment sale rules,
- Applications based on an agreement for the payment of tax
with conforming security,
- Applications for blanket withholding certificates,
and
- Applications on any other basis.
Format for Applications
Use Form 8288-B, Application for Withholding Certificate
for Dispositions by Foreign Persons of U.S. Real Property Interests,
to apply for a withholding certificate under categories (1),
(2), and (3).
Do not use Form 8288-B for applications under categories
(4), (5), and (6). For these categories follow the instructions given
here.
The application must be signed by the individual, or a duly
authorized agent (with a copy of the power of attorney, such as Form
2848, attached), a responsible officer in the case of a corporation, a
general partner in the case of a partnership, or a trustee, executor,
or equivalent fiduciary in the case of a trust or estate. The person
signing the application must verify under penalties of perjury that
all representations are true, correct, and complete to that person's
knowledge and belief. If the application is based in whole or in part
on information provided by another party to the transaction, that
information must be supported by a written verification signed under
penalties of perjury by that party and attached to the application.
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The application must be sent to:
Internal Revenue Service Center
P. O. Box 21086
Drop Point 8731 FIRPTA Unit
Philadelphia, PA 19114-0586.
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All applications for withholding certificates must use the
following format. The information must be provided in paragraphs
labeled to correspond with the numbers and letters set forth below. If
the information requested does not apply, place "N/A" in the
relevant space.
- Information on the application category:
- State which category describes the application (see
Categories, earlier),
- If a category (4) application:
- State whether the proposed agreement secures (A) the
transferor's maximum tax liability, or (B) the amount that would
otherwise have to be withheld, and
- State whether the proposed agreement and security instrument
conform to the standard formats.
- Information on the transferee or transferor:
- State the name, address, and taxpayer identification number,
if required by the regulations, of the person applying for the
withholding certificate,
- State whether that person is the transferee or transferor,
and
- State the name, address, and taxpayer identification number,
if required by the regulations, of all other transferees and
transferors of the U.S. real property interest for which the
withholding certificate is sought. If a person does not have a TIN,
the application must state that fact. If the transferor is requesting
an early refund, the transferor's TIN must be on the
application.
- Information on the U.S. real property interest for which the
withholding certificate is sought, state the:
- Type of interest (such as, interest in real property, in
associated personal property, or in a domestic U.S. real property
holding corporation),
- Contract price,
- Date of transfer,
- Location and general description if an interest in real
property,
- Class or type and amount of the interest in a U.S. real
property holding corporation, and
- Whether in the three preceding tax years: (1) U.S. income
tax returns were filed relating to the U.S. real property interest,
and if so, when and where those returns were filed, and if not, why
returns were not filed, and (2) U.S. income taxes were paid relating
to the U.S. real property interest, and if so, the amount of tax
paid.
- Provide full information concerning the basis for the
issuance of the withholding certificate. Although the information to
be included in this section of the application will vary from case to
case, the following rules provide general guidelines for the inclusion
of appropriate information for each category of application.
Category (4) applications.
If the application is based on an agreement for the payment of tax,
the application must include:
- Information establishing the transferor's maximum tax
liability, or the amount that otherwise has to be withheld,
- A signed copy of the agreement proposed by the applicant,
and
- A copy of the security instrument proposed by the
applicant.
Either the transferee or the transferor may enter into an
agreement for the payment of tax. The agreement is a contract between
the IRS and any other person and consists of two necessary elements.
Those elements are:
- A detailed description of the rights and obligations of
each, and
- A security instrument or other form of security acceptable
to the Commissioner or his delegate.
For more information on the agreement for the payment of tax,
including a sample agreement, see section 5 of Revenue Procedure
2000-35. Revenue Procedure 2000-35 is in Internal Revenue
Bulletin 2000-35.
There are four major types of security acceptable to the IRS. They
are:
- Bond with surety or guarantor,
- Bond with collateral,
- Letter of credit, and
- Guarantee (corporate transferors).
The IRS may, in unusual circumstances and at its discretion,
accept any additional form of security that it finds to be adequate.
For more information on acceptable security instruments, including
sample forms of these instruments, see section 6 of Revenue Procedure
2000-35.
Category (5) applications.
A blanket withholding certificate may be issued if the transferor
holding the U.S. real property interests provides an irrevocable
letter of credit or a guarantee and enters into a tax payment and
security agreement with the IRS. A blanket withholding certificate
excuses withholding concerning multiple dispositions of those property
interests by the transferor or the transferor's legal representative
during a period of no more than 12 months.
For more information, see section 9 of Revenue Procedure
2000-35.
Category (6) applications.
These are nonstandard applications and may be of the following
types.
Agreement for payment of tax with nonconforming security.
An applicant seeking to enter into an agreement for the payment of
tax but wanting to provide a nonconforming type of security must
include the following in the application:
- The information required for Category (4) applications,
discussed earlier,
- A description of the nonconforming security proposed by the
applicant, and
- A memorandum of law and facts establishing that the proposed
security is valid and enforceable and that it adequately protects the
government's interest.
Other nonstandard applications.
An application for a withholding certificate not previously
described must explain in detail the proposed basis for the issuance
of the certificate and set forth the reasons justifying the issuance
of a certificate on that basis.
Availability of records.The applicant must make
available to the IRS, within the time prescribed, all information
required to verify that representations relied upon in accepting the
agreement are accurate, and that the obligations assumed by the
applicant will be performed pursuant to the agreement. Failure to
provide requested information promptly will usually result in
rejection of the application, unless the IRS grants an extension of
the target date.
Amendments to Applications
An applicant for a withholding certificate may amend an otherwise
complete application by sending an amending statement to the
Commissioner or his delegate. There is no particular form required,
but the amending statement must provide the following information:
- The name, address, and taxpayer identification number (if
any) of the person providing the amending statement specifying whether
that person is the transferee or transferor,
- The date of the original application for a withholding
certificate that is being amended,
- A brief description of the real property interest for which
the original application for a withholding certificate was provided,
and
- The basis for the amendment including any change in the
facts supporting the original application for a withholding
certificate and any change in the terms of the withholding
certificate.
The statement must be signed and accompanied by a penalties of
perjury statement (discussed earlier under Format for
Applications).
If an amending statement is provided, the time in which the IRS
must act upon the application is extended by 30 days. If the amending
statement substantially changes the original application, the time for
acting upon the application is extended by 60 days. If an amending
statement is received after the withholding certificate has been
signed by the Commissioner or his delegate but has not been mailed to
the applicant, the IRS will have a 90-day extension of time in which
to act.
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