How does Section 453 interact with the sale of a business to a foreign buyer?

Question

Tyler Smith · Accepted Answer

The interaction of Section 453 installment sales with a foreign buyer introduces significant international tax considerations, primarily related to FIRPTA (Foreign Investment in Real Property Tax Act) and the potential for a foreign buyer to default on payments.

If the business being sold includes U.S. real property interests (USRPIs), FIRPTA rules generally require the buyer, whether domestic or foreign, to withhold 15% of the gross sales price from the seller. This withholding is remitted to the IRS to ensure the U.S. government collects tax on the gain. While Section 453 allows for capital gains tax deferral, FIRPTA withholding can significantly impact the cash flow of a seller, as the withholding applies to the gross amount, not just the gain, and is due at closing, regardless of the installment payment schedule.

Sellers can apply for a withholding certificate from the IRS to reduce or eliminate FIRPTA withholding if they can demonstrate that the actual tax liability will be lower than the amount withheld, or if the property is not a USRPI. This application process can take time. Additionally, dealing with a foreign buyer introduces practical risks regarding future payment collection and enforceability of the installment note across international borders. Due diligence on the buyer's financial stability and a robust legal agreement are even more critical. Sellers should always consult with international tax specialists to navigate FIRPTA and other cross-border tax implications when considering a Section 453 sale to a foreign entity.