Foreign sellers? FIRPTA withholding increases to 15%

WASHINGTON – Jan. 19, 2016 – Congress recently made changes to the U.S. Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). While two changes should benefit the real estate community, a third will impact foreign sellers of certain properties.

On the positive side, new FIRPTA rules will make U.S. commercial property more attractive to foreign investors, according to Ralph W. Holmen, associate general counsel for the National Association of Realtors^® (NAR). The law doubles the maximum amount of stock ownership a foreign investor may have in a U.S. publicly-traded real estate investment trust (REIT), bumping it up from the current 5 percent to 10 percent. It also permits certain foreign pension funds to invest in real estate investment trusts (REITs) without having FIRPTA treatment apply.

On the other hand, the new FIRPTA rules increase the withholding tax paid by foreign sellers of certain properties effective Feb. 17, 2016.

"The recently enacted Protecting American Taxpayers from Tax Hikes (PATH) Act (H.R. 2029) includes two very positive FIRPTA provisions that are conservatively estimated to boost foreign investment in U.S. commercial real estate by $20-$30 billion per year," writes Holmen. "However, as part of a package of tax changes to 'pay for' the two provisions, Congress also included an increase in the FIRPTA withholding rate from 10 percent to 15 percent."

How new withholding works

The law considers three levels of property purchases: A personal residence of $300,000 or less; a personal residence worth more than $300,000 but less than $1 million; and properties valued at $1 million or more:

$300,000: Foreign sellers currently pay no FIRPTA tax, and this doesn't change under the new rule, providing the property will be used as a residence
$300,000-$1 million: The current 10 percent FIRPTA tax does not change under the new rule, providing the property will be used as a residence
$1 million-plus: The FIRPTA tax goes up from the current 10 percent to 15 percent after Feb. 16. In this $1 million-plus category, it doesn't matter whether the property will be used as a residence or not

What is FIRPTA?

Congress created FIRPTA based on reports that foreign investors were purchasing U.S. real estate and then selling it at a profit without paying any U.S. taxes. Consequently, FIRPTA created a requirement forcing buyers to withhold 10 percent of the purchase price and remit it to the Internal Revenue Service at the time of closing, subject to a few exceptions.

"Usually, the settlement agent is the party that withholds and remits the funds to the IRS, but the buyer is legally responsible," writes Holmen. "In certain circumstances, the buyer's agent can also be held liable."

Florida Realtors contracts

The current version of Florida Realtors/Florida Bar forms and the CRSP-14a FIRPTA addendum contain language that refers to a 10 percent withholding. Since that 10 percent requirement changes for some transactions after Feb. 16, 2016, the association is currently working on changes that reflect the higher 15 percent for $1 million-plus property purchases.

Once forms have been updated, a notice will run in Florida Realtors News announcing the changes.

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