On December 18, President Obama signed the Protecting Americans from Tax Hikes (PATH) Act of 2015. This law creates significant changes to the provisions of the Internal Revenue Code of 1986, which amended the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
What does the new rule change about withholding requirements?
Settlement agents must begin holding back 10-15% proceeds from the sale of real property by foreign nationals. Property bought by foreign persons that will be used as a personal residence is exempt from the increase if the sales price does not exceed $1,000,000. If the previous exception for personal residences does not apply, the 10% withholding rate is retained. If the price is higher than $1,000,000, the new 15% withholding rate will apply.
What are the benefits?
The PATH Act benefits the real estate industry by doubling the maximum amount of stock ownership that a foreign investor may have in a real estate investment trust (REIT) from 5% to 10%. Another additional benefit is that the law permits certain foreign pension funds to invest in REITs without having FIRPTA treatment apply.
When does it go into effect?
The PATH Act is effective 60 days after Obama signed it into law. This applies to sales on and after FEBRUARY 17, 2016.
What are the guidelines settlement agents must follow when remitting funds to the IRS?
- If the amount realized is $300,000 (typically the sales price) or less, and the property will be used by the foreign buyer as a residence (within current regulations), no amount will be withheld or remitted to the IRS.
- If the amount realized above $300,000 but does not exceed $1,000,000 and the property will be used by the buyer as a residence, then the withholding rate is 10% of the entire amount realized.
- If the amount realized exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of how the property is used.
Are there any obligations for FIRPTA withholding by the real estate agent or broker?
If you represent the buyer or seller of real property subject to FIRPTA withholding, you could be liable for the tax that should have been withheld by the buyer in certain circumstances.
If you have additional questions about the PATH Act, please contact a tax professional.
What is F.I.R.P.T.A.?
F.I.R.P.T.A. is an acronym for Foreign Investment Real Property Tax Act. It was established in 1980 for the purpose of withholding the estimated amount of taxes which may be due on the gain of the disposition of a U.S. Real Property Interest from foreign persons. A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations which are considered U.S. real property holding corporations. Persons purchasing U.S. real property interests (transferee) from foreign personsare required to withhold 10 percent of the amount realized.
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What is the purpose of withholding 10%?
Real estate withholding is a prepayment of anticipated tax due on the gain of the sale of a U.S. real property interest. It is not an additional tax. Any difference between the amount paid and the amount owed is refunded to the seller when a tax return is filed.
Who is responsible for finding out if the transferor is a foreign person?
It is the transferee’s/buyer’s responsibility to determine if the transferor/seller is a foreign person and subject to withholding.
Are there exceptions from FIRPTA withholding?
Yes. Exceptions are explained on the IRS.GOV website here.
Who is responsible for withholding 10% of the amount realized?
Withholding is the responsibility of the transferee/buyer.
How and where is the F.I.R.P.T.A. withholding paid?
The buyer must complete IRS Form 8288 and Form 8288-A and remit them, along with the payment to the IRS at the address shown on Form 8288.
What is the settlement agent’s role with regards to F.I.R.P.T.A.?
The IRS Rule requires the transferee/buyer to determine if withholding applies and, if so to remit the withholding to the IRS. If the buyer has determined F.I.R.P.T.A. withholding applies, the buyer and seller may mutually instruct the settlement agent to deduct the 10%, gather the applicable forms and remit them to the IRS on their behalf.
Will a Limited Practice Officer (LPO) give legal advice with regards to F.I.R.P.T.A.?
A LPO or settlement agent is not qualified to provide legal or tax advice relating to F.I.R.P.T.A. If you are involved in a real estate transaction with a foreign person or entitiy and require legal advice, you will need to seek council from a professional other than the settlement agent.
More information on F.I.R.P.T.A. can be found here:
Internal Revenue Service – FIRPTA Withholding
Internal Revenue Service – Exceptions from FIRPTA withholding
Internal Revenue Service – Reporting and Paying Tax on U.S. Real Property Interests
Internal Revenue Service – Withholding Certificates (reductions in 10% withholding)
Internal Revenue Service – Definitions of terms and procedures unique to FIRPTA
Internal Revenue Service – Foreign Persons Involved in U.S. Real Estate Transactions
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