Question

Rocio, an RA and student at FAU, and her father, Nairo, a Columbian citizen, who does not reside in the US, jointly own a townhouse in Boca, where Rocio lived while going to FAU, but Nairo paid $100,000 for it. The townhouse is being sold for $150,000. Dot, a US citizen, is buying the townhouse as rental property. Is Dot required to withhold any amount?

Answer 1

Withholding of Tax on Dispositions of United States Real Property Interests :

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.

In the given situation Both Rocio and Nairo belong to Columbia and jointly own a townhouse in Boca.They are foreign persons and are selling the house to a US citizen, Dot. Its a clear case of disposition of propery by foreign person to US resident.In such cases the transferee/buyer must find out if the transferor is a foreign person. If the transferor is a foreign person and if transferee fail to withhold, he may be held liable for the tax.

The transferee,Dot in this case must deduct and withhold a tax on the total amount realized by Nairo on the disposition. The rate of withholding generally is 15% (10% for dispositions before February 17, 2016).

But an exception is if the transferee acquire the property for use as a residence and the amount realized (sales price) is not more than $300,000 then the transferee need not withhold the tax and this option is available only for individual.Transferee or a member of his family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant. For this exception, the transferee must be an individual.

CONCLUSION : Dot is purchasing the property as rental property he may reside in it or give it on rent.If he is residing in it since the sale consideration is less than $300000 he need not hold any withhold tax.
But Dot's intention is to earn rental income then he is required to hold a tax of 15% of $150000 i.e $22500 and pay the rest to Nairo.