What should a Title Officer know about the Foreign Investment Real Property Tax Act (FIRPTA) and a 1031 exchange? What IRS forms need to be filed and when? How does a 1031 exchange impact the transaction and FIRPTA reporting requirements are all questions a Title Officer or Attorney will face prior to the closing on real property interests owned by a foreign person.
IRS Forms 8288
FIRPTA requirements apply whenever a foreign person is selling real property within the United States. The rules require ten percent of the sales price to be withheld towards payment of the capital gains tax. Forms 8288, 8288A and 8288B must be filed with the IRS no later than twenty days post closing. The IRS may grant a withholding certificate that eliminates the ten percent withholding requirement. The transferror is the foreign person while the transferee is typically the closing entity or the Qualified Intermediary (QI) if a 1031 exchange is also initiated by the foreign person.
Treasury Regulation Section 1445
In a 1031 exchange, Treasury Regulation Section 1.1445-2(d)(2) states
” … a transferee or exchangor shall not be required to withhold under Code Section 1445 with respect to the transfer of a U.S. real property interest if the transferor notifies transferee that the operation of nonrecognition provision of the Code results in a tax-free transfer.”
No withholding is required given the 1031 exchange but the 8288 forms must be filed. Along with the forms, the QI should also include a Notice of Nonrecognition Transfer Statement providing the IRS with a confirmation signed by the QI that the foreign person is initiating a 1031 exchange.
Do you have a question or would like assistance with completing the 8288 forms? Click on the button below for your question to be answered by a Certified Exchange Specialist(r).
