FIRPTA withholding rate to increase to 15% for sales exceeding $1 million

FIRPTA withholding rate to increase to 15% for sales exceeding $1 million

Starting February 16, 2016, there will be changes to the Foreign Investment in Real Property Tax Act ("FIRPTA").

FIRPTA is a tax law passed in 1981 that requires foreign persons to pay U.S. income tax on the gains they make from selling U.S. real estate.

The duty is on the U.S. national buyer to deduct and withhold a portion of the sales price and report the sale to the IRS. Buyers can withhold less than the statutory amount if they obtain a determination of the specific amount of tax owed by the foreign national using IRS Form 8288-B.

In most cases, the settlement agent is the party that actually remits the funds to the IRS, but the buyer is held legally responsible. Additionally, until the tax is paid in full, the government obtains a security interest in the real property.

The 10% rate will still apply for those transactions in which the property is to be used by the Buyer as a residence, provided the sales price does not exceed $1,000,000, and the existing $300,000 “exemption” remains unaffected. So here are the new guidelines:

  • If the sales price is $300,000 or less, AND the property will be used by the Buyer as a residence (as provided for in the current regulations), no sums need be withheld or remitted.
  • If the sales price exceeds $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% on the full amount realized.
  • If the sales price exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the Transferee.
  • Under the law, the Buyer is the withholding agent and is responsible for withholding and remitting the proper amount to the IRS and could be liable for any additional withholding tax, penalty, and interest if their intent is ever challenged by the IRS.

    The current FAR/BAR contract form contains language specifically referring to a 10% withholding. An amendment to the contract for closings scheduled on or after February 16, 2016 should be added to change the potential rate of withholding to 15%.

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