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Withholding of U.S. Tax on the Disposition of U.S. Real Property

Withholding requirements

The United States requires a purchaser to withhold tax upon the acquisition of a U.S. real

property interest (USRPI) from a foreign (non-U.S.) vendor. The objective of such withholding is

to ensure that tax is paid by the foreign vendor on the gain (if there is one).

In general, a 10% federal withholding obligation will be imposed on anyone who purchases a

USRPI from a foreign vendor. Forms 8288 and 8288-A are to be used in reporting and remitting

the tax withheld. In most cases, these forms must be filed, and the tax withheld remitted

within 20 days from the date of sale. A purchaser failing to withhold can be held liable for the

amount that should have been withheld and any applicable penalties and interest.

Many states impose a withholding tax in addition to the federal withholding tax when property

in the state is being sold.

Exemptions from withholding

There are several exceptions to the general withholding requirements, including the following:

(1) Purchase of a residence for $300,000 or less—The requirement to withhold does not apply

if the purchaser acquires the property for use as a residence and its acquisition price is

$300,000 or less. A property is considered to have been acquired for use as a principal

residence if, on the date of transfer, the purchaser has definite plans to reside at the

property for at least 50% of the number of days that the property is in use during each

of the first two 12-month periods following the date of the transfer. The purchaser will

be considered to reside at a property on any day on which a member of his or her family

resides at the property.

(2) Vendor is not a foreign person—No tax needs to be withheld if an affidavit is provided

stating the vendor’s U.S. taxpayer identification number and the fact that the vendor is not

a foreign person.

(3) Withholding certificate is issued by the IRS—No tax needs to be withheld if the purchaser

receives the appropriate certificate/qualifying statement from the vendor. Generally, a

withholding certificate can be applied for on Form 8288-B.The IRS will ordinarily act upon a

request for a withholding certificate within 90 days after its receipt.

A withholding certificate may be issued where:

• The vendor has reached an agreement with the IRS for the payment of any tax resulting

from the disposition of the USRPI, and adequate security for its payment has been

provided, or

• The vendor’s gain from the sale is exempt from U.S. tax or a reduced withholding tax

amount is appropriate, and any previously unsatisfied withholding liability of the vendor

has been satisfied.

Filing requirements

A non-U.S. person disposing of a USRPI is generally required to file federal and state income

tax returns reporting the disposition of the property. The requirement to file applies whether or

not the proper withholding has been made by the purchaser at the time of the sale.

Current as of June 30, 2013