The Foreign Investment in Real Property Tax Act, known as FIRPTA, subjects a foreign seller of US real estate to a withholding of 15% of the gross sales price. This withholding is deducted from the net proceeds due to the seller and is required to be remitted to the Internal Revenue Service (IRS) no later than 20 days after closing.
While most of the time the determination of the foreign status of a seller is clear, there are times when this status is not quite so obvious. This is often the case when the seller is a limited liability company (LLC) formed in the US.
As illustrated below, a US LLC can be taxed in a variety of ways, depending on the particular circumstances:
Limited liability company with one owner (known as a single-member LLC)
A single-member LLC is a legitimate legal entity, but defaults to being disregarded for purposes of US income tax reporting. Any US income tax reporting is done in the name of the owner, not the name of the LLC. For example, if a foreign individual is the only owner of a US LLC, the US income tax reporting is done in the name of the foreign individual. In this situation, the FIRPTA withholding rules would apply as the seller for purposes of FIRPTA is the foreign individual, not the US LLC. The same would hold true if the single owner was a foreign corporation.
Limited liability company with more than one owner
A US LLC with more than one owner defaults to being taxed as a partnership for US income tax reporting purposes. The withholding rules under FIRPTA do not apply to US LLCs taxed as partnerships as this does not fall under the definition of a foreign seller. There are other withholding rules that apply in this situation (withholding rules pertaining to partnerships with foreign partners), but this withholding is done at the LLC level, not at the level of the sale of the US real estate owned by the LLC taxed as a partnership.
Limited liability company making a “check the box” election
Whether a US LLC has only a single owner or multiple owners, it can make an election to be taxed as a US corporation by filing Form 8832, Entity Classification Election, with the IRS. If approved by the IRS, the US LLC would file income tax returns reporting as a US corporation. A US corporation is not subject to the withholding rules under FIRPTA as it is not considered a foreign seller. The tax status of the owner(s) is not a factor in determining the tax status of the LLC that has elected to be taxed as a US corporation.
As you can see, when dealing with US limited liability companies, the applicability of the FIRPTA withholding is not evident and further inquiries are needed to make the determination.
Since every situation is unique, we are happy to advise you on the options available to you in complying with this requirement on the sale of your property.