U.S. Real Property Interest The disposition of a U.S. real property interest by a foreignperson (the transferor) is subject to income tax withholding. Thetransferee is the withholding agent. As the transferee, you mustdeduct and withhold a tax equal to 10% (or other amount) of the totalamount realized on the disposition (i.e., 10% of the purchase price).You must find out if the transferor is a foreign person. If thetransferor is a foreign person and you fail to withhold, you may beheld liable for the tax. A foreign person is a nonresident alien individual,foreign corporation that has not made an election under section 897(i)to be treated as a domestic corporation, foreign partnership, foreigntrust, or foreign estate. It does not include a resident alienindividual. The term transferor means any foreign person thatdisposes of a U.S. real property interest by sale, exchange, gift, orany other transfer. A transfer includes distributions toshareholders of a corporation, partners of a partnership, andbeneficiaries of a trust or estate. The term transferee means any person, foreign ordomestic, that acquires a U.S. real property interest by purchase,exchange, gift, or any other transfer. The amount realized by the transferor is the sum of: The cash paid, or to be paid (principal only), The fair market value of other property transferred, or tobe transferred, and The amount of any liability assumed by the transferee or towhich the property is subject immediately before and after thetransfer. The term U.S. real property interest means an interest,other than as a creditor, in real property (including an interest in amine, well, or other natural deposit) located in the United States orthe Virgin Islands, as well as certain personal property that isassociated with the use of real property (such as farming machinery).It also means any interest, other than as a creditor, in any domesticcorporation unless it is established that the corporation was at notime a U.S. real property holding corporation during the shorter ofthe period during which the interest was held, or the 5-year periodending on the date of disposition. If on the date of disposition, thecorporation did not hold any U.S. real property interests, and all theinterests held at any time during the shorter of the applicableperiods were disposed of in transactions in which the full amount ofany gain was recognized, then an interest in the corporation is not aU.S. real property interest. Corporations, partnerships, trusts, and estates.Withholding is required on certain distributions and othertransactions by domestic or foreign corporations, partnerships,trusts, and estates. A foreign corporation that distributes a U.S. real propertyinterest must withhold a tax equal to 35% of the gain it recognizes onthe distribution to its shareholders. However, this withholdingrequirement does not apply if the foreign corporation has electedunder section 897(i) to be treated as a domestic corporation. A domestic corporation must withhold a tax equal to 10% of the fairmarket value of the property distributed to a foreign person if: The foreign person's interest in the corporation is a U.S.real property interest, and The property distributed is either in redemption of stock orin liquidation of the corporation. Similarly, a domestic corporation, that is or was a U.S. realproperty holding corporation during the shorter of the period duringwhich the U.S. real property interest was held, or the 5-yearperiod ending on the date of disposition, must generally withhold atax equal to 10% of the fair market value of any money, securities, orany other property it distributes to a foreign person and which is notout of the domestic corporation's earnings and profits. If a domestic partnership that is not publicly traded disposes of aU.S. real property interest at a gain, the gain is treated aseffectively connected income and is subject to the rules explainedearlier under Partnership Withholding on Effectively ConnectedIncome. A publicly traded partnership that disposes of a U.S. real propertyinterest must withhold tax on distributions to foreign partners,unless it elects to withhold based on effectively connected taxableincome allocable to foreign partners as discussed earlier underPublicly Traded Partnerships. You are a withholding agent if you are a trustee, fiduciary, orexecutor of a trust or estate having one or more foreignbeneficiaries. You must establish a U.S. real property interestaccount. You enter in the account all gains and losses realized duringthe taxable year of the trust or estate from dispositions of U.S. realproperty interests. The withholding agent must withhold 35% on anydistribution to a foreign beneficiary that is attributable to thebalance in the real property interest account on the day of thedistribution. A distribution from a trust or estate to a beneficiary(foreign or domestic) will be treated as attributable first to anybalance in the U.S. real property interest account and then to otheramounts. A trust with more than 100 beneficiaries may elect to withhold fromeach distribution 35% of the amount attributable to the foreignbeneficiary's proportionate share of the current balance of thetrust's real property interest account. This election does not applyto publicly traded trusts or real estate investment trusts (REITs).For more information about this election, see section1.1445-5(c) of the Income Tax regulations. Publicly traded trusts and REITs must withhold on distributions ofU.S. real property interests to foreign persons. The withholding rateis 35%. For more information, including how to compute the amountsubject to withholding, see section 1.1445-8 of the regulations. Additional information.For additional information on the withholding rules that apply tocorporations, trusts, estates, and REITs, see Code section 1445 andthe regulations under that section. For additional information on thewithholding rules that apply to partnerships, see Code section 1446and Revenue Procedure 89-31, 1989-1 C.B. 895. You may alsowrite to the Internal Revenue Service, Assistant Commissioner(International), 950 L'Enfant Plaza South, S.W., Washington, DC 20024. Exceptions.You do not have to withhold if any of the following applies: You (the transferee) acquire the property for use as a homeand the amount realized (sales price) is not more than $300,000. Youor a member of your family must have definite plans to reside at theproperty for at least 50% of the number of days the property is usedby any person during each of the first two 12-month periods followingthe date of transfer. When counting the number of days the property isused, do not count the days the property will be vacant. The property disposed of (other than certain dispositions ofnonpublicly traded interests) is an interest in a domestic corporationif any class of stock of the corporation is regularly traded on anestablished securities market. The disposition is of an interest in a domestic corporationand that corporation furnishes you a certification stating, underpenalties of perjury, that the interest is not a U.S. real propertyinterest, or as of the date of disposition, the interest in thecorporation is not a U.S. real property interest by reason of Codesection 897(c)(1)(B). The certification must be dated not more than 30days before the date of transfer. The transferor gives you a certification stating, underpenalties of perjury, that the transferor is not a foreign person, andcontaining the transferor's name, U.S. taxpayer identification number,and home address (or office address, in the case of an entity). You receive a withholding certificate from the InternalRevenue Service that excuses withholding. See WithholdingCertificates, later. The transferor gives you written notice that no recognitionof any gain or loss on the transfer is required because of anonrecognition provision in the Internal Revenue Code or a provisionin a U.S. tax treaty. You must file a copy of the notice by the 20thday after the date of transfer with the Director, Philadelphia ServiceCenter, 11601 Roosevelt Blvd., Philadelphia, PA 19255, Attn: droppoint 543X. The amount the transferor realizes on the transfer of a U.S.real property interest is zero. The property is acquired by the United States, a U.S. stateor possession, a political subdivision, or the District ofColumbia. The grantor realizes an amount on the grant or lapse of anoption to acquire a U.S. real property interest. However, you mustwithhold on the sale, exchange, or exercise of that option. The disposition (other than certain dispositions ofnonpublicly traded interests) is of publicly traded partnerships ortrusts. Certifications.The certifications in items (3) and (4) are not effective if youhave actual knowledge, or receive a notice from an agent, that theyare false. If you are required by regulations to furnish a copy of thecertification to the IRS and you fail to do so in the time and mannerprescribed, the certifications are not effective. Liability of agents.If you receive either of the certifications discussed in item (3)or (4) above and the transferor's agent or your agent (thetransferee's agent) has actual knowledge that the certification isfalse, or in the case of (3) above, that the corporation is a foreigncorporation, the agent must notify you, or the agent will be heldliable for the tax. The agent's liability is limited to the amount ofpay the agent gets from the transaction. An agent is any person who represents the transferor or transfereein any negotiation with another person (or another person's agent)relating to the transaction, or in settling the transaction. A personis not treated as an agent if the person only performs one or more ofthe following acts related to the transaction: Receipt and the disbursement of any part of theconsideration, Recording of any document, Typing, copying, and other clerical tasks, Obtaining title insurance reports and reports concerning thecondition of the property, or Transmitting documents between the parties. Reporting andPaying the Tax Transferees must use Forms 8288 and 8288-A to report and payto the IRS any tax withheld on the acquisition of U.S. real propertyinterests. These forms must also be used by corporations,partnerships, estates, and trusts that must withhold tax ondistributions and other transactions involving U.S. real propertyinterests. For partnerships disposing of U.S. real property interests, themanner of reporting and paying over the tax withheld is the same asdiscussed earlier under Partnership Withholding on EffectivelyConnected Income. For publicly traded trusts and real estate investment trusts youmust use Forms 1042 and 1042-S for reporting and paying over taxwithheld on distributions from dispositions of U.S. real propertyinterests. Use Income Codes 24, 25, and 26 on Form 1042-S fortransactions involving these entities. Form 8288,U.S. Withholding Tax Return for Dispositions by ForeignPersons of U.S. Real Property Interests. The tax withheld on theacquisition of a U.S. real property interest from a foreign person isreported and paid using Form 8288. Form 8288 also serves as thetransmittal form for copies A and B of Form 8288-A,Statement of Withholding on Dispositions by Foreign Persons ofU.S. Real Property Interests. Generally, you must file Form8288 by the 20th day after the date of the transfer. If an application for a withholding certificate (discussed later)is provided on the day of, or at any time before, the date of atransfer, and on the date of transfer the application is still pendingwith the IRS, the amount that must be withheld by the transferee doesnot have to be reported and paid over immediately. That amount (orother appropriate amount) must be reported and paid over within 20days following the day on which a copy of the withholding certificateor notice of denial is mailed by the IRS. If the principal purpose of applying for a withholding certificateis to delay paying over the withheld tax to the IRS, the transfereewill be subject to interest and penalties. The interest and penaltieswill be assessed beginning on the 21st day after the transfer untilthe day payment is made on the amount ultimately paid. Form 8288-A.Each transferor or distributee must be notified of the amount ofwithholding tax paid to the IRS. Form 8288-A is used for thispurpose. Attach copies A and B to Form 8288. IRS will stamp Copy B andsend it to the person subject to withholding. Keep Copy C for yourrecords. Form 1099-S,Proceeds From Real Estate Transactions. Generally, thereal estate broker or other person responsible for closing thetransaction must report the sale of the property to the IRS using Form1099-S. For more information about Form 1099-S, see theInstructions for Forms 1099, 1098, 5498, and W-2G. Withholding Certificates The amount that must be withheld from the disposition of a U.S.real property interest can be adjusted pursuant to a withholdingcertificate issued by the IRS. The transferee, the transferee's agent,or the transferor may request a withholding certificate. The IRS willgenerally act on these requests within 90 days after receipt of acomplete application. A withholding certificate may be issued due to: A determination by the IRS that reduced withholding isappropriate because either: The amount that must be withheld would be more than thetransferor's maximum tax liability, or Withholding of the reduced amount would not jeopardizecollection of the tax, The exemption from U.S. tax of all gain realized by thetransferor, or An agreement for the payment of tax providing security forthe tax liability, entered into by the transferee ortransferor. Categories.All applications for withholding certificates are divided into sixbasic categories. This categorizing provides for specific informationthat is needed to process the applications. The six categories are: Applications based on a claim that the transfer is entitledto nonrecognition treatment or is exempt from tax, Applications based solely on a calculation of thetransferor's maximum tax liability, Applications under special installment sale rules, Applications based on an agreement for the payment of taxwith conforming security, Applications for blanket withholding certificates,and Applications on any other basis. Format for Applications Use Form 8288-B, Application for Withholding Certificatefor Dispositions by Foreign Persons of U.S. Real Property Interests,to apply for a withholding certificate under categories 1, 2,and 3. Do not use Form 8288-B for applications under categories 4,5, and 6. For these categories follow the instructions given here. The application must be signed by the individual, or a dulyauthorized agent (with a copy of the power of attorney attached), aresponsible officer in the case of a corporation, a general partner inthe case of a partnership, or a trustee, executor, or equivalentfiduciary in the case of a trust or estate. The person signing theapplication must verify under penalties of perjury that allrepresentations are true, correct, and complete to that person'sknowledge and belief. If the application is based in whole or in parton information provided by another party to the transaction, thatinformation must be supported by a written verification signed underpenalties of perjury by that party and attached to the application. The application must be sent to: Internal Revenue Service Center P. O. Box 21086 d. p. 543 East Bldg./FIRPTA-X Philadelphia, PA 19114-0586 All applications for withholding certificates must use thefollowing format. The information must be provided in paragraphslabeled to correspond with the numbers and letters set forth below. Ifthe information requested does not apply, place "N/A" in therelevant space. Information on the application category: State which category describes the application (seeCategories, earlier), If a Category 4 application: State whether the proposed agreement secures (A) thetransferor's maximum tax liability, or (B) the amount that wouldotherwise have to be withheld, and State whether the proposed agreement and security instrumentconform to the standard formats. Information on the transferee or transferor: The name, address, and identification number, if any, of theperson applying for the withholding certificate, State whether that person is the transferee or transferor,and The name, address, and identification number, if any, of allother transferees and transferors of the U.S. real property interestfor which the withholding certificate is sought. Information on the U.S. real property interest for which thewithholding certificate is sought: Type of interest (such as, interest in real property, inassociated personal property, or in a domestic U.S. real propertyholding corporation), Contract price, Date of transfer, Location and general description if an interest in realproperty, and Class or type and amount of the interest in a U.S. realproperty holding corporation. Provide full information concerning the basis for theissuance of the withholding certificate. Although the information tobe included in this section of the application will vary from case tocase, the following rules provide general guidelines for the inclusionof appropriate information for each category of application. Category 4 applications.If the application is based on an agreement for the payment of tax,the application must include: Information establishing the transferor's maximum taxliability, or the amount that otherwise has to be withheld, A signed copy of the agreement proposed by the applicant,and A copy of the security instrument proposed by theapplicant. Either the transferee or the transferor may enter into anagreement for the payment of tax. The agreement is a contract betweenthe IRS and any other person and consists of two necessary elements.Those elements are: A detailed description of the rights and obligations ofeach, and A security instrument or other form of security acceptableto the Assistant Commissioner (International). For more information on the agreement for the payment of tax,including a sample agreement, see section 5 of Revenue Procedure88-23. There are four major types of security acceptable to the IRS. Theyare: Bond with surety or guarantor, Bond with collateral, Letter of credit, and Guarantee (corporate transferors). The IRS may, in unusual circumstances and at its discretion,accept any additional form of security that it finds to be adequate. For more information on acceptable security instruments, includingsample forms of these instruments, see section 6 of Revenue Procedure88-23. Category 5 applications.A blanket withholding certificate may be issued if the transferorholding the U.S. real property interests provides an irrevocableletter of credit or a guarantee and enters into a tax payment andsecurity agreement with the IRS. A blanket withholding certificateexcuses withholding concerning multiple dispositions of those propertyinterests by the transferor or the transferor's legal representativeduring a period of no more than 12 months. For more information, see section 9 of Revenue Procedure88-23. Category 6 applications.These are nonstandard applications and may be of the followingtypes. Agreement for payment of tax with nonconforming security.An applicant seeking to enter into an agreement for the payment oftax but wanting to provide a nonconforming type of security mustinclude the following in the application: The information required for Category 4 applications,discussed earlier, A description of the nonconforming security proposed by theapplicant, and A memorandum of law and facts establishing that the proposedsecurity is valid and enforceable and that it adequately protects thegovernment's interest. Other nonstandard applications.An application for a withholding certificate not previouslydescribed must explain in detail the proposed basis for the issuanceof the certificate and set forth the reasons justifying the issuanceof a certificate on that basis. Availability of records.The applicant must make available to the IRS, within the timeprescribed, all information required to verify that representationsrelied upon in accepting the agreement are accurate, and that theobligations assumed by the applicant will be performed pursuant to theagreement. Failure to provide requested information promptly willusually result in rejection of the application, unless the IRS grantsan extension of the target date. Amendments to Applications An applicant for a withholding certificate may amend an otherwisecomplete application by sending an amending statement to the AssistantCommissioner (International). There is no particular form required,but the amending statement must provide the following information: The name, address, and identification number (if any) of theperson providing the amending statement specifying whether that personis the transferee or transferor, The date of the original application for a withholdingcertificate that is being amended, A brief description of the real property interest for whichthe original application for a withholding certificate was provided,and The basis for the amendment including any change in thefacts supporting the original application for a withholdingcertificate and any change in the terms of the withholdingcertificate. The statement must be signed and accompanied by a penalties ofperjury statement (discussed earlier under Format forApplications). If an amending statement is provided, the time in which the IRSmust act upon the application is extended by 30 days. If the amendingstatement substantially changes the original application, the time foracting upon the application is extended by 60 days. If an amendingstatement is received after the withholding certificate has beensigned by the Assistant Commissioner (International) or his or herdelegate but has not been mailed to the applicant, the IRS will have a90-day extension of time in which to act.