FIRPTA for Trust-Owned DVC: Special Considerations

Some DVC contracts are held in trusts rather than in the names of individual owners. Whether FIRPTA applies and how it works depends on the type of trust involved.

Foreign Trusts: FIRPTA Applies

A foreign trust — one that is not subject to US court jurisdiction or whose assets are controlled by non-US persons — is treated as a foreign person for FIRPTA purposes. If a foreign trust sells a DVC contract, FIRPTA withholding applies exactly as it would for an individual foreign seller. The 15% is withheld at closing and the trust must file a US tax return to recover any excess withholding.

Domestic Trusts: Generally Exempt

A trust that qualifies as a US person under the Internal Revenue Code is generally not subject to FIRPTA. A trust is a domestic (US) trust if a US court has authority to supervise the trust's administration and US persons control all substantial decisions of the trust. If your DVC contract is held in a US living trust with a US trustee and US court jurisdiction, FIRPTA typically does not apply.

Grantor Trusts

For grantor trusts, the tax attributes pass through to the grantor. If the grantor is a foreign person, FIRPTA applies when the trust sells the DVC contract. The grantor files the 1040-NR and claims any refund as if they had owned the contract individually.

Getting This Right Matters

Misclassifying a trust's status can result in failure to withhold when withholding was required, exposing the buyer and closing agent to IRS penalties. If your DVC contract is held in any kind of trust, make sure the closing agent and your tax advisor understand the trust structure before the sale closes. Do not assume a trust is automatically exempt without verifying its classification under US tax law.