What Is a FIRPTA Withholding Certificate?

FIRPTA withholding-certificate

When Should You Request a FIRPTA Withholding Certificate?

A withholding certificate allows the buyer to withhold a reduced amount from a property disposition subject to the terms of FIRPTA. Normally, when someone purchases a property from a non-resident alien or a foreign entity, they must withhold 15% of the realized amount and send it to the IRS.

If they have a withholding certificate, they withhold nothing or a lesser amount. Applying for a withholding certificate can be complicated. To help you out, this guide explains when to apply for a withholding certificate and how to fill out the application.

When Does the IRS Issue FIRTPA Withholding Certificates?

The IRS issues FIRPTA withholding certificates in the following situations:

When the amount that should be withheld is more than the seller's maximum tax liability.
When reducing the withholding does not impede the IRS's ability to collect the tax from the seller.
When the seller is exempt from U.S. tax on the gain realized from the transfer.
When the transferor or transferee agrees to pay the tax and provides a security to cover the outstanding liability.

The application process varies based on why you're applying. You can find detailed instructions in the following sections.

Who Should Request a FIRPTA Withholding Certificate?

The transferee (buyer), their agent, or the transferor (seller) can request a withholding certificate. If the seller applies for a withholding certificate, they must alert the buyer in writing on the day of or the day prior to the transfer.

How to Apply for a FIRPTA Withholding Certificate

When you apply for a FIRPTA withholding certificate, you need to choose from one of six categories to explain why you're applying, and the application process varies based on which category you select. Here are the six options:

Transfers exempt from income tax or entitled to non-recognition treatment.
Withholding based on the seller's maximum tax liability.
Installment sale rules.
Agreement to cover the tax payment with a security.
Request for a blanket FIRPTA withholding certificate.
Other basis or criteria.

If you're applying for a FIRPTA withholding certificate for reasons one, two, or three, you should file Form 8288-B (Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests).

How to Fill Out Form 8288-B

This form requires the following details:

Name and contact details of the transferor and transferee.
Whether the applicant is the transferor or transferee.
The name of the withholding agent - that's generally the buyer.
Address where you want the withholding certificate sent.
A description of the property.
The date of the transfer.
How the property is being used.
If a U.S. income tax return related to the property was filed in the last three years.
The amount of any U.S. taxes paid during the last three years.
Why the withholding certificate should be issued — Again, when using Form 8288-B, the options include 1) exemption from U.S. tax or non-recognition treatment. 2) maximum tax liability less than the withholding amount, or 3) installment sale rules.
If the transferor has any outstanding withholding from a similar transaction.

Then, you need to note if the application was related to section 1445(e) 1, 2, 3, 5, or 6.

Section 1445(e) Rules for FIRPTA Withholding Certificates

U.S. Code 1445(e) notes special situations related to U.S. real property distributions by corporations, partnerships, trusts, and estates. If your transaction does not involve any of these entities, it is not subject to the Code 1445(e) rules.

If one of these entities is involved, you need to note if any of the following apply and then follow the applicable rules. Form 8288-B has boxes you can tick to indicate if your transaction is subject to these rules.

Domestic partnerships, trusts, and estates must withhold 20% or the highest tax in effect for the tax year based on the portion of the gain realized by a non-resident alien. For example, if 15% of a domestic partnership's realized gain is allocated to a non-resident alien, the partnership should multiply 15% by the total realized gain and then withhold 20% of that number.
Foreign corporations should withhold a tax based on the highest rate in effect for the year when they realize a gain from a U.S. real property distribution.
When domestic corporations distribute property to non-resident aliens, they should withhold 15% of the amount realized by the foreign shareholder. This rule only applies if the domestic corporation holds or has held U.S. real property during an applicable period of time.
The transferee (buyer/recipient) should withhold 15% of the realized amount if they receive a disposition of a partnership interest or a beneficial interest in a trust or estate.
If a regulated investment company or a real estate investment trust (REIT) makes a distribution based on a realized gain in U.S. real property to a non-resident alien or a foreign corporation, the investment company or REIT should withhold 20% or the highest tax rate for that year.

These are pared-down descriptions of the legal code. To ensure you are following the applicable rules for your situation, you should consult with a tax pro experienced with FIRPTA.

How to Apply for FIRPTA Without Form 8288-B

To apply based on reasons four, five, or, six, you do not file Form 8288-B. Instead, you need to provide a written application, and the information needs to be labeled with the following letters and numbers.

Info about why you're applying
1. Whether you're applying based on category four, five, or six.
2. If applying based on category four, (i) note if the agreement covers A) the transferor (seller's) maximum tax liability or B) the amount that would have otherwise been withheld (ii) note if the agreement and security instrument conform to the standard formats.
Details about the transferee (buyer) and transferor (seller)
1. Name, address, and tax identification number of the person applying for the withholding certificate.
2. If the applicant is the transferor (seller) or transferee (buyer).
Details about the property.
1. Type of interest — for example, interest in real property, interest in personal property associated with real property, or interest in a domestic U.S. real property holding corporation.
2. Contract price.
3. Date of the transfer.
4. If the interest is in real property, the location and a description.
5. Class or type and amount if the interest is in a U.S. real property holding corporation.
6. Details about the following over the last three preceding tax years 1) Whether or not U.S. tax returns were filed related to the U.S. real property interest. If so, where the returns were filed. If not, why the returns weren't filed. 2) Amount of any U.S. income taxes paid related to the U.S. real property interest.
Information about why the withholding certificate should be issued.

Then, you must also include additional information based on the category under which you're applying.

Category Four (Agreement to Cover the FIRPTA Tax With a Security)

Include an explanation of the transferor's maximum tax liability or the amount to be withheld, a signed copy of the proposed agreement, and a copy of the security instrument you want to use. You can use a bond with surety or guarantor, a bond with collateral, or a letter of credit. Corporate transformers can use a guarantee. The IRS may accept alternative securities at its discretion.

Category Five (Request for Blanket FIRPTA Withholding Certificate)

A blanket FIRPTA withholding certificate applies to all of the transferors' property dispositions over the next 12 months. The applicant must provide an irrevocable letter of credit or a guarantee and enter into a tax payment and security agreement with the IRS.

Category Six (Other Reasons for Requesting a Withholding Certificate)

You can apply under category six if you're using a non-conforming security. In this case, follow the instructions for category four, and then, describe the security and explain how it protects the government's interest. If you're using category six for any other reason, you should explain why the withholding certificate is justified.

Who Should Sign the Request for a FIRPTA Withholding Certificate?

Finally, you need to sign the application. Individuals can sign their own applications. If a corporation or partnership is requesting an application, a responsible officer or a general partner can sign. With trusts and estates, trustees, executors, or equivalent fiduciaries can sign.

If an authorized agent signs the application, you also must submit Form 2848 (Power of Attorney and Declaration of Representative).

If you include information provided by another party, you should also include a written and signed verification from them that the information is correct.

Where to Mail Applications for FIRPTA Withholding Certificates

Send applications for FIRPTA withholding certificates to this address:

Ogden Service Center
P.O. Box 409101
Ogden, UT 84409

How to Make Changes to a FIRPTA Withholding Certificate Application

You can amend a withholding certificate application by sending a statement to the address where you submitted your application. The IRS doesn't require you to follow a specific format, but you should include the following details:

Name, address, and tax ID of the person making the amendment.
Whether the person is the transferor (seller) or transferee (buyer).
Date of the original withholding certificate application.
Description of the real property.
Reason for requesting an amendment.
Description of changes in the facts presented in the original application.
Signature.

When you submit an amendment, the IRS gets an additional 30 days to respond to your original application. In cases of significant changes, the IRS has 60 extra days. If the withholding certificate has been approved but not mailed back to the applicant, the IRS has 90 days.

Requesting a FIRPTA Withholding Certificate to Buy Time

If the IRS believes that you have applied for a withholding certificate to buy extra time to submit the withholding, the transferee (buyer) will incur interest and penalties. Penalties and interest will accrue from the 21st date after the date of transfer until the payment is made.

How to Request a FIRPTA Withholding Certificate If You Live Overseas

If you live overseas, you can request a withholding certificate using Form 8288-B as explained above. However, you should request to have the certificate mailed to the escrow or closing company. Note their information in Box 5 of this form.

Applying for a FIRPTA Withholding Certificate Without a Tax ID

If the transferor (sell) or the transferee (buyer) does not have a tax identification number, they can request one when they apply for the FIRPTA withholding certificate. To request a tax ID, file Form W-7 (Application for IRS Individual Taxpayer Identification Number) with Form 8288-B.

Then, mail the entire package to

ITIN Operation
P.O. Box 149342
Austin, TX 78714-9342

The IRS typically takes 10 days to process requests for tax identification numbers.

What to Expect After You Request a Certificate

The IRS normally responds to withholding certificate requests within 90 days of receiving the information. As indicated above, the processing time increases if you request an amendment to the application.

How Long Does It Take to Request a FIRPTA Withholding Certificate?

The IRS estimates that it will take taxpayers 2 hours and 7 minutes to learn about the form and the FIRPTA law. Then, it estimates an additional 2 hours and 4 minutes to handle the recordkeeping. According to the IRS, it should take 1 hour and 7 minutes to prepare the form and 20 minutes to send the form to the IRS.

The total time needed to apply for a FIRPTA withholding certificate should be about 5 hours and 38 minutes. Note that these are estimates and can vary widely depending on the situation.

Get Help Requesting a FIRPTA Withholding Certificate

Applying for a FIRPTA withholding certificate can be a confusing process. But if you don't have the certificate, you will have to deal with withholding. In the absence of a withholding certificate, the buyer will have to withhold 15% of the seller's realized gain. As a result, the seller won't be able to receive all of the proceeds from the sale, potentially putting them into a financial bind.

You don't have to navigate this process on your own. Using TaxCure, you can search for local tax professionals who are experienced with FIRPTA requirements. Don't let FIRPTA rules hurt the success of your transaction — find help with FIRPTA today.