How does a foreign seller get their 15% FIRPTA withholding back?

Question

I have a foreign client who is completing a 1031 exchange, and has decided to bring extra cash to the closing table to replenish the "withheld" FIRPTA amount on the sale of the relinquished property. This will allow us to complete the 1031 exchange. With that said, we will still file the 1031 declaration form and 8288-B form with our CPA in hopes that the certificate gets back in time before closing. I just have 2 questions:

1) How can he eventually retain the "15% withheld" funds from the escrow account? Do we have to show proof to the buyer that he has settled the capital gains tax and/or provide the IRS certificate?

2) Since he is replenishing the "withheld" sum, is it possible for us to close the replacement property on a different date? This would allow us to bypass a simultaneous closing and buy a new property within a 180-day timeframe to fulfill the 1031 exchange requirement.

Dave Foster · Answer

@James Bakun, that's a very interesting strategy. It's all going to depend on the IRS being willing to accept the addition of cash to the settlement statement to equate a replacement of the FIRPTA withholding. the subsequent tax return with the 8824 on it would seem to be enough for the refund of the withholding. I'm not aware of it ever being tested in court. But I like the theory.

James Bakun · Answer

Thanks @Dave Foster

To avoid timing complications, we're thinking he would bring extra funds to replenish the FIRPTA withholding. This would allow us to close on the relinquished property and find a replacement property within 180 days. I assume there is no need for a simultaneous closing since he is bringing extra cash to replenish the withheld amount?

At the end of the year, he would file a tax return and get the withholding back from the IRS after paying capital gains on the 15% withheld amount. Is that correct?

Dave Foster · Answer

@James Bakun, he will have to file a tax return. File the form 8824 along with that reporting the 1031 exchange. He'll have to have no tax due. And then he should get a refund for his withholding. Also lots of prayer might help!!

The only way to avoid the simultaneous closing is if he receives the certificate of non-withholding. But if you're doing a simultaneous closing then there shouldn't be any firpta withholding.

How does a foreign seller get their 15% FIRPTA withholding back?

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