Transferor’s tax return responsibility upon selling real property interest

The individual transferor of the U.S. real property interest is required to file a Form 1040NR along with Schedule D, Form 6251, and Form 8288-A to meet the tax obligation. If the transferor is a corporation, then a Form 1120F with appropriate schedules and Form 8288-A will have to be filed.

Transferor’s tax return responsibility during ownership of real property interest

If the real property interest is used by the foreign person or entity to produce income during the taxable year, and it is in the United States, IRC Section 871 imposes a 30 percent tax rate or tax treaty rate, if lower. This income is to be treated as, “income not effectively connected with a U.S. trade or business.” However, the foreign person or entity can make an Election under IRC Section 871(d) to treat the real property income as income effectively connected with a U.S. trade or business, thus making it subject to graduated tax rates. The required income tax return to file will be a Form 1040NR or 1120F along with the appropriate schedules. In addition to the election, the foreign person or entity will need to file Form W-8ECI with the payer of the income to identify it as being effectively connected income.

Note that if you receive exemption certifications and the transferor’s agent or your agent (the transferee’s agent) has actual knowledge that the certification is false or that the corporation is a foreign corporation, the agent must notify you, or the agent will be held liable for the tax. The agent’s liability is limited to the amount of pay the agent gets from the transaction.

An agent is any person who represents the transferor or transferee in any negotiation with another person (or another person’s agent) relating to the transaction, or in settling the transaction.

A person is not an agent if the person only performs one or more of the following acts related to the transaction:

  • Receipt and disbursement of any part of the consideration,
  • Recording of any document
  • Typing, copying, and other clerical tasks
  • Obtaining title insurance reports and reports concerning the condition of the property
  • Transmitting documents between the parties

A Withholding Agent is personally liable for the full amount of FIRPTA withholding required to be withheld, plus penalties and interest. A Withholding Agent is any person having the control, receipt, custody, disposal or payment of income that is subject to withholding. Generally, the person who pays an amount to the foreign person subject to withholding, must do FIRPTA withholding.