What are the considerations for a non-U.S. seller using Section 453 for the sale of U.S. real property interests under FIRPTA?

Question

Tyler Smith · Accepted Answer

Non-U.S. sellers of U.S. real property interests face unique challenges and opportunities when considering a Section 453 installment sale, primarily due to the Foreign Investment in Real Property Tax Act, or FIRPTA. FIRPTA generally requires a buyer to withhold 15 percent of the gross sales price from a non-U.S. seller. However, Section 453 can offer some relief in managing the tax impact, but it does not eliminate FIRPTA withholding requirements.

Under FIRPTA regulations, if an installment sale is used, withholding is generally required on each installment payment, not just the initial down payment. The amount withheld is usually 15 percent of the principal portion of each payment. This differs from a full cash sale where the entire 15 percent is withheld upfront. This structure allows the non-U.S. seller to potentially spread out their tax liability, similar to how capital gains are deferred under Section 453 for U.S. persons. However, a non-U.S. seller must still file a U.S. tax return to report the gain and claim any over-withholding. It is crucial for non-U.S. sellers to apply for a withholding certificate from the IRS, which can reduce or even eliminate the FIRPTA withholding if the seller can demonstrate that the actual tax liability will be less than the amount otherwise required to be withheld. Without such a certificate, the 15 percent withholding on each principal payment will apply. Navigating FIRPTA and Section 453 simultaneously requires careful tax planning and often, professional assistance to ensure compliance and optimize deferral benefits.