Page 8 - Foreign Investor Guide - Hawaii

Foreign Investment in Real Property Tax Act of 1980
and Section 1031 Exchanges
A foreign person that sells or exchanges
a U.S. real property interest is subject to a
required withholding under the Foreign
Investment in Real Property Tax Act of 1980
(FIRPTA). A U.S. real property interest includes
sales of interests in parcels of real property.
The required withholding is 15% of the gross
sales price unless the buyer is acquiring the
property as a personal residence and the sale
price is between $300,001 and $1 million in
which case the withholding will only be 10%.
This amount must be remitted to the IRS
within 20 days after the date of transfer.
Additionally, Treasury Decision 9082
(effective November 4, 2003) requires all
foreign sellers of U.S. real property to have
a Taxpayer Identification Number (TIN) to
pay the required withholding or to request a
reduced tax withholding. Individuals who do
not qualify for Social Security Numbers (SSN)
may – by filing form W-7 – obtain Individual
Taxpayer Identification Numbers (ITINs) to
meet the requirement to supply a TIN.
What is the definition of “foreign person”
under FIRPTA?
FIRPTA defines a “foreign person” as a non-
resident alien individual, a foreign corporation
that has not made an election under section
897(i) of the Internal Revenue Code to be
treated as a domestic corporation, a foreign
partnership, a foreign trust, or a foreign
estate. The term “foreign person” does not
include a resident alien individual.
Who is required to withhold and remit the
withholding to the IRS?
The buyer/transferee and certain agents of
the buyer are responsible for withholding the
required amount.
How and when is the withholding paid?
The tax must be reported and paid using IRS
Form 8288, which must be filed with the IRS
by the 20th day after the date of the transfer.
Are there any exceptions to the
withholding requirement?
Yes, there are numerous exceptions to the
withholding requirement. The most common
exceptions are as follows:
1. Buyer acquires the property for use as a
home and the sales price is not more than
$300,000;
2. Seller provides a certification stating under
penalty of perjury that they are not a
foreign person;
3. Seller obtains a withholding certificate
from the IRS that excuses the withholding;
4. Seller provides the buyer a notice of non-
recognition stating that no recognition
of gain or loss on the transfer is required
because of a provisions in the IRC Code or
U.S. tax treaty; or
5. Amount the seller realizes from the
disposition is zero.
How does the seller obtain a Withholding
Certificate?
A transferor looking to reduce or eliminate
the FIRPTA withholding amount must file a
Form 8288-B, Application for Withholding
Certificate for Disposition by Foreign Persons
of U.S. Real Property Interests. Form 8288-B
requires a TIN. Thus, a transfer-or who does
not qualify for an SSN may attach Form
should be aware that it takes the IRS 90 days
to respond to an Application.