If an estate sells a United States real property interest (USRPI), several tax implications and reporting requirements come into play under the Foreign Investment in Real Property Tax Act (FIRPTA) and related provisions of the Internal Revenue Code.
- Recognition of Gain or Loss:
- The estate must report any gain or loss on the sale of the USRPI. This is consistent with the general rule that gain or loss from the disposition of a USRPI by a foreign person is treated as effectively connected with a U.S. trade or business and subject to U.S. tax.
- Withholding Requirements:
- The buyer of the USRPI is required to withhold 15% of the amount realized on the sale. This withholding is intended to ensure that the IRS collects tax on the gain realized by the foreign estate from the sale of the USRPI.
- The buyer must report the amount withheld on Form 8288, U.S. Withholding Tax Return for Disposition by Foreign Persons of U.S. Real Property Interests, which must be filed by the 20th day after the transfer.
- Filing Requirements for the Estate:
- To receive credit for the withholding, the estate must file Form 1040-NR, U.S. Nonresident Alien Income Tax Return, and attach Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.
- Tax Calculation:
- The gain or loss recognized by the estate on the sale of the USRPI is subject to U.S. tax. For individuals, losses are taken into account only to the extent they would be deductible under section 165(c), which generally limits the deduction of losses to those incurred in a trade or business, in a transaction entered into for profit, or arising from certain casualty or theft losses.
- Special Rules for Estates:
- Assets held by an estate are treated as held proportionately by its beneficiaries. Therefore, any gain or loss from the sale of a USRPI by the estate is attributable to the beneficiaries to the extent of their interest in the estate.
- Additional Considerations:
- If the estate is a foreign estate, it may be subject to additional rules and regulations under FIRPTA, including potential elections to be treated as a domestic corporation for certain tax purposes.
In summary, when an estate sells a USRPI, it must report the gain or loss, comply with withholding requirements, and file the necessary tax returns to account for the transaction. The buyer is responsible for withholding 15% of the amount realized and reporting it to the IRS. The estate must then file Form 1040-NR to claim credit for the withholding and ensure proper tax treatment of the gain or loss.
Sources:
Notice 88-72
Modern FIRPTA: A Transactional Perspective
§ 897. Disposition of investment in United States real property
Determining U.S. Real Property Holding Corporation Status
§ 1445. Withholding of tax on dispositions of United States real property interests
Home Thoughts From Abroad: When Foreigners Purchase U.S. Homes
