On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (“PATH”), was signed into law. PATH includes modifications to the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), that requires foreign persons to pay U.S. income tax on the gains they make from selling U.S. real estate. FIRPTA imposes a duty on a U.S. national buyer to deduct and withhold a portion of the sales price and to report the sale to the IRS.
The rules for the amount of FIRPTA withholding changed on February 16, 2016. When withholding is required, the amount usually has been 10% of the sales price. In many, but not all, circumstances, a new withholding amount will apply on and after Feb. 16. That new amount is 15% of the sales price.
The following summarizes the withholding provisions required by FIRPTA beginning Feb. 16:
Withholding not required if:
- Seller furnishes buyer with a Non Foreign Person Certification.
- Withholding Certificate is issued to Seller stating withholding is not due.
- Seller is a “qualified foreign pension fund” or a subsidiary thereof.
- Sales price is $300,000.00 or less and buyer intends to reside in the property.
- Residential property acquired for residential use and the sales price is $1,000,000 or less, the rate of withholding is 10%.
- Withholding Certificate is issued to Seller stating a reduced amount is to be withheld.
Six (6) typical withholding categories:
- 15% withholding and the filing of a tax return for a refund the following year.
- Withholding Certificate is issued, amount withheld, if any, based on the Certificate.
- No withholding if sales price is $300,000.00 or less with intent to reside.
- No withholding if Seller presents a Non Foreign Person Certification.
- No withholding if Seller is a qualified foreign pension fund.
- 10% withholding for residential transfers of $1,000,000.00 or less.