Section 1445 of the Internal Revenue Code generally imposes a withholding obligation on purchasers (i.e., the “transferee”) with respect to a seller’s disposition of a “U.S. real property interest” (USRPI). Under section 1461, the transferee/purchaser is liable for withholding tax on the disposition. Withholding is a mechanism to collect the tax that is imposed by the Foreign Investment in Real Property Tax Act (“FIRPTA”). Notably, though beyond the scope of this article, the FIRPTA statute and regulations contain several exceptions to the withholding requirement, and in certain circumstances, allow a transferee to obtain a withholding certificate to reduce the withholding agent’s withholding liability.
The FIRPTA regulations impose liability on any person required to withhold who fails to do so. The regulations provide that:
Every person required to deduct and withhold tax under section 1445 is made liable for that tax by section 1461. Therefore, a person that is required to deduct and withhold tax but fails to do so may be held liable for the payment of the tax and any applicable penalties and interest.
[I]f a transferee is required to deduct and withhold tax under section 1445 but fails to do so, then the tax shall be assessed against and collected from that transferee. Such person may also be subject to any of the civil and criminal penalties that apply. Corporate officers or other responsible persons may be subject to a civil penalty under section 6672 equal to the amount that should have been withheld and paid over.
Generally, the transferee must withhold a tax on the total amount that the foreign person realizes on the disposition. The withholding rate is generally 15% (10% for dispositions prior to February 17, 2016). Note that a foreign corporation that distributes a U.S. real property interest to its shareholders must withhold a tax equal to 21% of the gain it recognizes on the distribution.
For these purposes, the amount realized is the sum of:
- The cash paid, or to be paid;
- The fair market value of other property transferred, or to be transferred; and
- The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.
If the property transferred was owned jointly by U.S. and foreign persons, the amount realized should be allocated between the transferors based on the capital contribution of each transferor.