Thomas C. Roberge & Company

HOW DO YOU HANDLE THE 10%

FIRPTA WITHHOLDING RULE

WHEN ONE SELLER IS FOREIGN AND ONE IS U.S.?

October 13, 2006

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

When a buyer purchases U.S. real estate from a foreign person, 10% of the gross purchase price must be withheld and paid to the U.S. tax authorities as an estimated income tax payment on behalf of the foreign seller. It is not relevant whether the buyer is a U.S. or foreign person for purposes of this rule.

For example, if you purchased U.S. real estate from John and Mary Smith, who were citizens and residents of Scotland, for $1 million, withholding of $100,000 would be required; $50,000 for John Smith and $50,000 for Mary Smith.

But what would happen if one of the sellers was a U.S. person and one of the sellers was a foreign person. Withholding would be required on the one-half of the purchase price allocable to the foreign seller.

For example, assume John and Mary Smith are selling their U.S. real estate for $1 million. They are residents of Hong Kong. John is a U.S. citizen and Mary is a citizen of the United Kingdom. There is no 10% withholding on John's one-half of the gross sales price since he is a U.S. person (even though he resides in Hong Kong). John would furnish a non-foreign affidavit at closing to exempt his portion of the sales price from the 10% FIRPTA withholding. Mary would be subject to the 10% withholding on her one-half. For FIRPTA reporting, the amount realized would be $500,000 and the amount withheld would be $50,000.

The 10% withholding could not be avoided on Mary's one-half by her transferring her one-half interest to John right before the closing. The 10% withholding on Mary's portion could also not be avoided if she possessed a U.S. social security or tax identification number, had been filing U.S. nonresident income tax returns for many years, or if she was losing money on the sale (although she may be able to file a withholding certificate for relief in the last instance).

Please contact us on our St. Petersburg hotline at (727) 822-9393 if you have questions.

Internal Revenue Service Circular 230 Disclosure You are hereby advised that any tax advice contained in this newsletter is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or to support the marketing of any tax transactions or matters addressed herein.