As many of our real estate transactions are with foreign customers, I wanted to make you aware of recent Changes to FIRPTA.
Changes to the Foreign Investment in Real Property Act (FIRPTA) will take effect beginning February 16, 2016. Foreign nationals selling real estate property in the United States will see withholdings of 15% of sale proceeds (instead of 10%), if the amount realized (typically the selling price) exceeds 1 Million Dollars.
For Sales under 1 Million Dollars and over $300,000, AND the buyer will occupy the property as a residence, the withholding remains at 10 percent. For Sales under $300,000 AND the buyer will occupy the property as a residence, no funds need to be withheld.
These new changes were signed into law at the end of 2015 under HR 2029 (Divison Q- Short Title “Protecting Americans from Tax Hikes Act of 2015”). Section 324 details changes:
SEC. 324. INCREASE IN RATE OF WITHHOLDING OF TAX ON DISPOSITIONS OF UNITED STATES REAL PROPERTY INTERESTS.
(a) In General.—Subsections (a), (e)(3), (e)(4), and (e)(5) of section 1445 are each amended by striking “10 percent” and inserting “15 percent”.
(b) Exception For Certain Residences.—Section 1445(c) is amended by adding at the end the following new paragraph:
“(4) REDUCED RATE OF WITHHOLDING FOR RESIDENCE WHERE AMOUNT REALIZED DOES NOT EXCEED $1,000,000.—In the case of a disposition—
“(A) of property which is acquired by the transferee for use by the transferee as a residence,
“(B) with respect to which the amount realized for such property does not exceed $1,000,000, and
“(C) to which subsection (b)(5) does not apply,
subsection (a) shall be applied by substituting ‘10 percent’ for ‘15 percent’.”.
(c) Effective Date.—The amendments made by this section shall apply to dispositions after the date which is 60 days after the date of the enactment of this Act.
Under the FIRPTA law that was passed in 1981, foreign sellers are required to pay US income tax on gains received from selling real estate property. Although Closing Agents typically withhold the proceeds on behalf of the buyer, referencing the FIRPTA requirement on the Settlement Statement and remitting the funds to the IRS, the legal obligation to collect the funds and report the property sale to the IRS is actually the responsibility of the US buyer. In addition, the government obtains a security interest in the property until the full amount of the tax has been paid.
Buyers (and Sellers) should note: If a buyer purchases real estate from a foreign seller who requires them to sign and claim that they will use the property as a residence in an effort to lower or remove the withholding amount, the buyer may be fully liable for any withholding tax due, penalties and interest owed, should the IRS reject the buyer's claim of residence.
Disclaimer: This is for informational purposes only. For more detailed information on FIRPTA and how it may or may not apply to you, please read the law and consult with your tax adviser/attorney.