Congress Increases FIRPTA Withholding Rate…
FIRPTA is a law passed in 1981 requiring foreign persons to pay U.S. Income tax on the gains they make from the sale of U.S. real estate. The buyer of property sold by a foreign person is legally obligated to withhold a portion of the sales price and report the sale to the IRS but, of course, in most cases the settlement agent is the party that prepares the withholding forms and remits the required payment to the IRS. In new legislated enacted by Congress and signed by President Obama, the withholding taxes for sales by foreign nationals will increase to 15% of the total sales price (up from the current 10%). The changes do not affect the current FIRPTA exemptions, including an exemption that eliminates the withholding requirement for (i) sales of property for $300,000 or less, which is to be used by the purchaser as a primary residence; or (ii) vacant land. In addition, the current 10% withholding tax amount still applies to sales of property to buyers who will utilize the property as a primary residence if the sales price is less than $1 million.
Therefore, here is a thumbnail sketch of the effect of this new legislation:
- If the sales price is $300,000 or less AND the property will be used by the buyer as a primary residence, the withholding tax rate is 0%
- If the sales price exceeds $300,000, but does not exceed $1 million, AND the property will be used by the buyer as a primary residence, the withholding rate is 10%
- If the sales price exceeds $1 million, then the withholding rate is 15%, regardless of the use of the property by the buyer
These changes to the FIRPTA withholding requirements are effective February 16, 2016.