Generally you do not have to withhold in the following situations; however, notification requirements must be met:

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1. You (the transferee) acquire the property for use as a home and the amount realized (generally sale 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.

2. The property disposed of (other than certain dispositions of non-publicly 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 United States Real Property Holding Corporation (USRPHC), and you must withhold on any disposition.

3. 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.

4. 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).

5. You receive a withholding certificate from the Internal Revenue Service that excuses withholding. Refer to Withholding Certificates.

6. The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a non-recognition 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.

7. The amount the transferor realizes on the transfer of a U.S. real property interest is zero.

8. The property is acquired by the United States, a U.S. state or possession, a political subdivision thereof, or the District of Columbia.

 

CPA Advice: In certain situations the foreign seller may have lost money on the sale or only made a small profit and the 10 percent of the purchase price significantly exceeds the real tax the foreign seller would be required to pay. If this is the case, the seller can submit an application to the IRS requesting that the amount withheld by the buyer is for a lower amount. In order to submit this application for reduced withholding (Form 8288-B), both the buyer and seller must have a tax identification number (ITIN) or submit an application for an ITIN along with Form 8288-B. If you are going to submit an application for reduced withholding, you need to do this in advance of the sale because it can take the IRS up to three months to approve it. Depending upon circumstances, the parties may want to delay the closing.

 

 9. 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.

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 10. The disposition (other than certain dispositions of non-publicly 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.

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CPA Advice: There are various options that the buyer has regarding how to take title of the property. It can be individually, through a flow-though entity, domestic corporation or foreign corporation. Foreign persons who die while owning U.S. real property are subject to estate tax and only have a $60,000 exemption whereas a U.S. person would have a $2 million exemption. The foreign buyer needs to be aware of the estate tax and income tax ramifications. It is essential that this decision is made prior to the purchase.