What are the rules for using Section 453 when a foreign person sells US real property?

Question

Tyler Smith · Accepted Answer

When a foreign person sells U.S. real property, the transaction falls under the Foreign Investment in Real Property Tax Act (FIRPTA), which imposes specific withholding requirements. While a foreign seller can generally utilize Section 453 to defer capital gains on the sale of U.S. real property interests, the FIRPTA withholding rules interact uniquely with the installment method.

FIRPTA generally requires a buyer to withhold 15% of the gross sales price on the disposition of a U.S. real property interest by a foreign person. This withholding is due regardless of whether the seller is using an installment sale method for tax recognition. This means that even if the foreign seller is deferring the recognition of gain under Section 453, the FIRPTA withholding obligation typically remains at the time of sale, based on the full sales price, unless specific exemptions or reductions apply.

However, a foreign seller may apply for a withholding certificate from the IRS to reduce or eliminate the FIRPTA withholding. This certificate can be requested if the seller establishes that their maximum tax liability is less than the amount otherwise required to be withheld, or that no tax is due. For installment sales, a foreign seller can request a withholding certificate that allows for withholding only on the principal payments actually received, corresponding to the gain recognized under Section 453. This requires a specific application to the IRS (Form 8828-B). Without such a certificate, the 15% gross proceeds withholding can create a significant cash flow burden for a foreign seller using an installment sale, as the tax is due upfront while the gain is deferred. Proper tax planning and application for a withholding certificate are critical for foreign sellers of U.S. real property utilizing Section 453.