FIRPTA: Increased Withholding and Other Changes
Most professionals have familiarity with the Foreign Investment in Real Property Tax Act (“FIRPTA”), especially those that have foreign clients investing in U.S. real estate. On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”). The PATH Act significantly alters FIRPTA withholding for foreign persons disposing of investments in U.S. real estate. Realtors, accountants, closing agents and title companies need to familiarize themselves with the changes.
The PATH Act increases the FIRPTA withholding rate from 10 percent to 15 percent on certain dispositions and distributions of United States Real Property Interests (“USRPIs”). Similarly, the withholding rate for the transfer of a partnership interest or the beneficial interest in a trust or estate has been increased from 10 percent to 15 percent. The new withholding rate applies to all such dispositions that take place after February 16, 2016. However, the new FIRPTA rules allow for a 10 percent withholding rate where the amount realized on the disposition of property being used as a residence is between $300,000.00 and $1 million. In other words, if a foreign person sells his or her personal residence for $999,000.00 the amount to be withheld shall be $99,900.00. However, if the foreign person sells his or her personal residence for $1,000,100.00, the amount to be withheld on the sale shall be $150,015.00. The amount withheld is offset by the gain on the disposition of the USRPI and is refundable to the extent the amount withheld exceeds the underlying tax liability. The increased FIRPTA withholding rate is not an actual increase in tax, but a means of ensuring compliance with U.S. tax law. An exemption found in the old rule remains in place, providing that a foreign person is not subject to FIRPTA withholding where the property sold is used as a residence and the amount realized does not exceed $300,000.00.