Articles Posted in 8288-B/Withholding Certificates

By Michael W. Brooks, Esq.

As discussed in Part 1, we know Foreign Investors are permitted to enter IRC Section 1031 (like-kind exchange) transactions provided certain conditions are met.  The Foreign Investor can avoid (really delay) paying tax on the sale of the first property (the relinquished property), provided the Foreign Investor identifies a qualifying replacement property within 45 days of the sale and completes the purchase of the replacement property within 180 days of the sale.  But what about the 15% (of the gross sales price) non-US seller withholding tax?  Must the escrow company withhold 15% of the sales price because the seller is foreign (even though the foreign party is entering into a 1031 like-kind exchange)?  The answer is yes- 15% of the gross sales price must still generally be withheld at the time of closing, and not distributed to the Foreign Investor or to the 1031 Accommodator.  This is where 1031 transactions and the rules of FIRPTA (the Foreign Investment in Real Property Tax Act) intersect.  The Foreign Investor entering into a like-kind exchange transaction has a big problem with respect to this 15% withholding tax requirement under FIRPTA.  For IRC Section 1031 to work, the Foreign Investor must complete the purchase of the replacement property within six months, so he or she will need the 15% held by escrow back quickly, or he or she will blow the like-kind exchange and not be able to avoid the recognition of taxes on the sale relinquished property.

Consider the example below, where a Canadian couple needs their 15% back quickly, or they will owe tax on the sale of their first property.

What is the 8288-B Process?

By Michael W. Brooks

Non- US sellers of US real estate are subject to a withholding tax at time of sale (either 15% or 10% of the gross sales price). The withholding tax isn’t really a tax, it’s better thought of as a security deposit to ensure the real tax eventually is paid by the non-US person (so the IRS doesn’t have to trust the foreign seller to mail in a check from their home in Shanghai). In 98 or 99 out of 100 instances , the withholding tax amount of 15% or 10% of the sales price will exceed (and maybe greatly exceed) the actual federal income tax owed by the foreign seller (for a rough estimate of the income tax due- simply multiply the seller’s gain made on the sale x 15%). But note the normal refund process (of the withholding tax minus the real tax) requires the foreign seller to wait until January of the next calendar year to simply file a tax return to obtain the refund, and the refund itself will take a few months to arrive after the filing. So the foreign seller must sometimes wait up to a year and a half after the sale to obtain this sizable refund. The IRS Form 8288-B withholding certificate application (via an experienced tax professional because this work is tricky) offers an alternative to this absurdly long wait.