Congress passed and President Obama signed into law in December 2015 important changes to the Internal Revenue Code section dealing with the withholding tax on the sale of U.S. real estate by non U.S. investors. This code section has been known as the Foreign Investment in Real Property Tax Act of 1980 (referred to as FIRPTA). The amending law provisions were contained in a law known as the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).
Under FIRPTA, foreign investors are subject to withholding on dispositions of U.S. real estate. With the new law, the rate of FIRPTA withholding increases from 10% of the gross sales price to 15% effective February 16, 2016.
FIRPTA makes it the responsibility of the buyer of the U.S. real estate to withhold the proper amount from the foreign seller. If the buyer fails to withhold the proper amount, they can be held liable for the withholding. The buyer’s closing agent generally acts on the buyer’s behalf to assist, with meeting any withholding obligations, and making payment to the U.S. Treasury.
The previous rules provided for an exception to FIRPTA withholding on the sale of U.S. real estate. Under the new rules this exception is continued provided: 1) the sales price is $300,000 or less and 2) the buyer (including family members) intends to use the property for personal purposes as a residence for at least 50% of the time the property is in use for the next two 12-month periods following the transfer.
The days the property is unoccupied are excluded in the 50% calculation. Vacant land is specifically not eligible for this treatment, even if the buyer intends to build a residence on the property. For the exception to apply, the buyer must be an individual, as opposed to a partnership, corporation, estate or trust.
The FIRPTA rules allow for a reduction of the 15% withholding rate to the prior 10%, if the sales price does not exceed $1,000,000 and, just like for the exception to FIRPTA withholding, the buyer intends to use the property as a residence.
If the actual tax on the sale is significantly less than the 15% withholding (or 10% as applicable), or non-recognition treatment applies, the seller may apply for a withholding certificate from the IRS. This withholding certificate allows for an amount of less than 15% of the gross sales price (or 10% as applicable) to be withheld.
Prior to making any purchase of U.S. real estate, non U.S. buyers should consult qualified legal and tax advisors regarding the form of ownership that should be used and the tax implications for different ownership structures.