Who withholds FIRPTA in a 1031 exchange: the buyer, the closing agent or the qualified intermediary?

The statute puts the duty on the transferee, and the regulations make that person liable

Section 1445(a) says the transferee shall deduct and withhold 15% of the amount realized when a foreign person disposes of a US real property interest, and section 1445(f)(2) defines the transferee as the person acquiring the interest. Reg. section 1.1445-1(g) widens it slightly: any person, foreign or domestic, that acquires a US real property interest by purchase, exchange, gift or any other transfer.

Reg. section 1.1445-1(e) states the consequence: every person required to withhold is made liable for the tax by section 1461, and a transferee that fails to withhold can be assessed the tax plus interest and penalties. The IRS FIRPTA page says the same thing in plain words: in most cases the buyer is the withholding agent, and a buyer who does not withhold may be liable for the tax. The Form 8288-B instructions describe the withholding agent as normally the buyer or other transferee.

Where two or more people buy together, Reg. section 1.1445-1(b)(1) obligates each of them, and the obligation is satisfied if one withholds and pays over the full amount. The buyer files Forms 8288 and 8288-A within 20 days of the transfer, or holds the money while a certificate application filed by closing is pending, as covered on FIRPTA withholding in a 1031.

The intermediary, escrow and title company are agents at most, and a ministerial role is not agency

Reg. section 1.1445-4(f)(1) defines a transferor's agent or transferee's agent as a person who represents the transferor or transferee in negotiating with the other party or in settling the transaction. Paragraph (f)(3) then excludes anyone whose role is solely ministerial: receiving and disbursing the consideration, recording documents, clerical work, obtaining title insurance or condition reports, and transmitting documents between the parties.

A qualified intermediary that holds exchange funds and passes documents is doing those listed tasks. One that advises the seller on structuring the transfer is representing the seller. The regulation draws the line at representation, not at the job title, so whether your intermediary or escrow officer is an agent depends on what they actually did in your deal.

Being an agent does not make anyone the withholding agent. It creates a different duty: under Reg. section 1.1445-4(a) an agent must notify the transferee if it knows the seller's non-foreign certification is false, in writing, as soon as possible and no later than the transfer date under paragraph (c)(1), with a copy to the IRS. An agent that stays silent is liable under paragraph (e) for the tax the buyer should have withheld, capped at the compensation the agent earned on the transaction. Publication 515 states the same cap.

A qualified substitute can take the seller's affidavit so the buyer never sees it

Most sellers are not foreign, and the ordinary way a buyer is excused is the seller's certification of non-foreign status, the FIRPTA affidavit. Section 1445(b)(9) allows the affidavit to be furnished to a qualified substitute, who then gives the buyer a statement under penalty of perjury that it holds the affidavit. That keeps the seller's taxpayer identification number with the closing attorney or title company rather than in the buyer's file.

Section 1445(d) extends the notice and liability rules to qualified substitutes, so a substitute with actual knowledge that the affidavit is false must tell the buyer. For a foreign seller none of this helps: there is no affidavit to give, and the withholding certificate is the only route.

When the foreign exchanger buys, it becomes the transferee and must withhold on its own seller

The roles reverse on the replacement side. A nonresident buying replacement property is the transferee of that property. If the replacement seller is a US person, the exchanger collects the non-foreign certification and withholds nothing. If the replacement seller is also foreign, the exchanger must withhold 15% of the amount realized, file Forms 8288 and 8288-A within 20 days, and pay the tax over, using exchange funds disbursed by the intermediary for the purchase.

That buyer needs a US taxpayer identification number of its own. The IRS ITIN guidance for property buyers and sellers says all transferees and foreign transferors must provide TINs on the withholding forms, and a buyer without one applies on Form W-7 under Exception 4. The Instructions for Form 8288 add that the buyer must file even if the seller's TIN is missing.

When the replacement is a DST interest, the seller of the interest is the trust or its sponsor, a domestic entity that certifies non-foreign status, so the exchanger withholds nothing on that purchase. The trust's own withholding on rent and on a later sale is on DSTs for foreign investors.

Hypothetical: a $1,200,000 relinquished sale and a $1,000,000 foreign-to-foreign replacement

A nonresident sells a rental for $1,200,000 through a qualified intermediary, with Form 8288-B filed a week before closing. The buyer withholds $180,000 and, by escrow agreement, holds it; the intermediary receives $1,020,000. The buyer is the withholding agent and signs Form 8288 when the IRS rules; the escrow company that holds the $180,000 is performing a ministerial task. All figures are hypothetical and rounded; confirm your own with your intermediary and tax adviser.

On day 120 the exchanger buys a $1,000,000 replacement from a seller who is also a nonresident and has not applied for a certificate. Now the exchanger is the transferee: it directs the intermediary to fund $850,000 to the seller and $150,000 to the IRS with Forms 8288 and 8288-A under the exchanger's own ITIN, within 20 days of closing. The seller of the replacement gets a stamped Form 8288-A for its own return.

What to write into the contract and the escrow instructions

The paperwork is simple once the roles are clear. The closing-day mechanics and the certificate timing cover the rest.

• Name the buyer as the party that withholds and files Form 8288, and the escrow holder as the party that physically holds the funds while the certificate application is pending.
• Direct the escrow to release withheld funds to the qualified intermediary if the certificate issues inside the exchange period, and to the seller only afterwards.
• Have the seller give the buyer written notice of the Form 8288-B filing on or before the transfer date, as Reg. section 1.1445-1(c)(2) requires.
• Ask every agent in the deal whether it is representing a party; an agent who learns of a false certification after the transfer has until the third day after discovery to give notice.
• On the replacement purchase, collect a non-foreign certification or a Form 8288-B notice from the seller before the exchanger's funds move, and confirm the exchanger has its own TIN for the buyer-side forms.