Change to FIRPTA Withholding Tax Law

Change to the Withholding Tax Law on Real Estate Sales by Non-US Persons – as of February 17, 2016

firpta-withholding-300x264Congress has enacted a significant change to the required withholding tax on sales of US real estate by non-US persons, effective on real estate sales closing on or after February 17, 2016.  On December 18, 2015, Federal legislation enacted the “Protecting Americans from Tax Hikes Act of 2015″ (PATH).  The intent of the PATH Act is to facilitate significant amount of foreign capital investments in U.S. real estate.  Included in the PATH Act are changes to the Internal Revenue Code, which affect the Foreign Investment and Real Property Tax Act of 1980 (FIRPTA).

As escrow holders, we need to be concerned only with the Act’s increase of the rate of withholding on the sale of U.S. real property interests. The FIRPTA withholding requirement will increase from 10% to 15% of the gross sales price on most transactions other than a sale of a personal residence where the amount realized is $1 Million.

Under the new Tax Law, instead of two possible general outcomes for how much tax must be withheld on real estate sales by non-US person, there now exists three possible outcomes.   Perhaps the revised withholding tax rules under the new tax law are best understood by the reviewing the following summary table:

 

APPROPRIATE WITHHOLDING TAX RATE UNDER NEW TAX LAW:

Buyer Intends to Use Property

As a Residence?

Yes No
$300,000 and Under $0 15%
$300,001 – $1,000,000 10% 15%
Over $1,000,000 15% 15%

FIRPTA is designed to keep foreign investors from avoiding payment of required taxes on the proceeds of sale of real property out of the United States. FIRPTA withholding has been in existence for many years and is imposed on gross proceeds of the real estate sales.  Sellers still can apply for reduced withholding or a waiver of the withholding requirement by filing IRS Form 8288-B with the IRS no later than the date of close of escrow.  Seller/investors may also request an adjustment with the filing of their tax return.

FIRPTA changes

This information is provided only as a guide and we suggest you speak with your tax counselor.