A non-foreign certification is a document that protects buyers of real property interests from liability for the IRS withholding tax, which applies if the seller is a foreign person. If a seller is a non U.S. citizen or resident, then FIRPTA (The Foreign Investment in Property Tax Act) applies and the buyer must withhold 15% of the sale price at the closing (10% before February 17, 2016). Even though the taxable gain of a transaction is earned by and is taxable to the foreign seller, the buyer is held liable for the tax if the foreign seller does not pay it. The withholding is required even if the transaction is through an installment sale.
However, there are exceptions to FIRPTA, where withholding is not required: when the purchaser will use the property as his residence and was purchased for a price of $300,000 or less, or when the seller is a not a foreign person and shows proof of it, or if it is an interest in a nonpublicly traded domestic corporation where the corporation provides proof of US based, or if acquiring shares of a publicly traded corporation regardless of where it is incorporated.
If FIRPTA applies, the buyer must report the sale to the IRS on Forms 8288 and 8288-A, and pay the required tax withholding by the 20th day after the date of transfer. The foreign seller must have a tax identification number (ITIN).
Yet, if withholding is required, the amount may be reduced to less than 15% of the full price only when certification by the IRS is requested that a reduced amount applies. The responsibility lies with the buyer because the IRS wants to make sure taxes are paid in case the foreign seller leaves the country.
There are several different forms and documents that need to be filed and reviewed by an attorney. This is a very complex area of law and those who wish to go through it better consult a knowledgeable attorney.
If you’re not sure wether you fall under this property owner exception or not, feel free to call us or email us to schedule a consultation. EPGD Business Law has been helping foreigners through FBAR, FIRPTA, ITIN, etc. info@epgdlaw.com / (786) 837-6787
