By R. Scott Jones, Esq.

This article summarizes the tax withholding rules imposed on a buyer and his/her agent when purchasing U.S. real estate from a nonresident alien for U.S. tax purposes.

Nonresident alien individuals and foreign corporations are subject to tax on realized gain from the disposition of an interest in U.S. real property, held directly or indirectly. The gain is taxed as if it were effectively connected with the conduct of a U.S. trade or business, whether or not the foreign person is in fact engaged in a U.S. trade or business during the taxable year.

When Tax Withholding is Required

Furthermore,pursuant tothe Foreign Investmentin Real Property Tax Act 1980 (FIRPTA), the Internal Revenue Code generally requires any transferee (buyer) of a U.S. Real Property Interest (USRPI) buyer to withhold from the purchase price an amount which constitutes a tax on the foreign transfer or (seller). The normal withholding rate under Internal Revenue Code (IRC) section 1445 is 10% of the amount realized by the seller on the disposition. The amount realized by the seller is the sum of the following:

1) The cash paid, or to be paid (principalonly),

2) The fair market value of other property transferred, or to be transferred, and

3) The outstanding amount of any liability assumed by the buyer or to which the property is subject immediately before and after the transfer.

There is no deduction for any expensesofsale.

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