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The withholding tax is intended to ensure that the IRS will be able collect income tax on the gains realized on the sale of such interests.
According to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) a US real property interest by a foreign person (the transferor) is subject to income tax withholding - income tax responsibility is determined upon filing a tax return - and if there is no income tax responsibility - all withholding would be refunded.
Persons purchasing US real property interests (transferee) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 10% of the amount realized (special rules for foreign corporations)
There are exemptions from FIRPTA mandatory withholding - see here - http://www.irs.gov/businesses/small/international/article/0,,id=102254,00.html
You are not exempt from withholding - but as long as you do not expect any payments due to you - there will not be FIRPTA withholding and you are correct - the exemption form would be useless.
Thank you for the response.
I will not receive any proceeds through the sale, however the escrow company maintains that an affidavit of non-foreign status form be completed prior to closing in order to verify is withholding is required. I either need to return this form or some other document evidencing that I am exempt in order for escrow to provide same to the Buyer. I am advised that if no form is received then escrow will withhold 10%.
To further complicate things, this is a short sale and all charges have been approved by my existing lender of record (i.e. closing costs, commissions etc.). Escrow is stating that since I technically still own the property that the FIRPTA withholding is applicable. Therefore, they would have to go back to the lender for another approval, which probably will not fly. I doubt my lender would accept the large withholding amount to be sent to the IRS. Please advise of this.
In most situation FIRPTA withholding exemptions is included in the sale contract - means the buyer/transferee agrees with exemption.
The form f8288b may be used if any exemption may be applied and you decide to use it regardless if there is a taxable gain on the sale - while the buyer might have no any knowledge about seller's capital gain and tax reporting requirements.