FIRPTA notice requirements for property acquired in foreclosure sale.

• Author: Smith, Annette B.
• Position: Foreign Investment in Real Property Tax Act of 1980

The provisions of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA, part of the Omnibus Reconciliation Act of 1980, P.L. 96-499) are codified in Sec. 897. They subject to U.S. federal income taxation a foreign person's gains from disposition of a U.S. real property interest (USRPI), regardless of whether the foreign person's U.S. activities amount to a U.S. trade or business. Sec. 1445 sets forth the withholding obligations (and exceptions) of the parties involved in a foreign person's disposition of a USRPI under FIRPTA. The Sec. 1445 regulations also provide notification requirements of FIRPTA transactions for transferors, transferees, targets of dispositions, and the IRS.

Parties involved in the disposition of a Sec. 897 USRPI as the result of a repossession of or foreclosure on the property need to be aware of their Sec. 1445(a) withholding requirements, as well as the availability of alternative withholding and notice requirements for foreclosure dispositions as provided in Regs. Sec. 1.1445-2(d)(3).

Alternative FIRPTA Rules for Foreclosures

The alternative FIRPTA withholding and notice requirements for foreclosure sales are consistent with the underlying purpose of FIRPTA: to ensure that, at some level, U.S. income tax is imposed on the disposition of a USRPI. However, these alternative requirements take into consideration that the transferor (i.e., debtor) in a foreclosure sale is unlikely to have gain from disposition of the USRPI. The alternative requirements also factor in the added role of a court or trustee in the foreclosure sale.

Withholding requirements: Generally, a transferee of a USRPI must withhold, report, and pay over to the IRS a tax under Sec. 1445(a) equal to 10% of the amount realized on the sale by the 20th day after the transaction. However, a transferee of a USRPI pursuant to a repossession or foreclosure on such property (under a mortgage, security agreement, deed of trust, or other instrument securing a debt) may report and pay, by that date, the lesser of the Sec. 1445(a) withholding tax or an "alternative amount," as defined in Regs. Sec. 1.1445-2(d)(3)(i)(A), if the transferee complies with special notification requirements (described below).

The alternative amount is the amount, if any, as determined by a court or trustee with jurisdiction over the foreclosure that accrues to the transferor out of the amount realized from the foreclosure sale. This amount does not include any portion of a...