PATH Act Changes FIRPTA Withholding

For many years, under the Foreign Investment in Real Property Tax Act (FIRPTA), the buyer of a U.S. real property from a foreign person has been required to withhold a percentage of the sales price, and to forward those funds to the IRS along with required documentation.

The purpose of FIRPTA is to ensure that a foreign seller who receives monetary benefit when disposing of U.S. real property files the appropriate tax return documentation. (It should be noted that money withheld is not an additional tax on the foreign seller. It is an estimated payment against the tax imposed on gain from the sale.)

The Protecting Americans from Tax Hikes (PATH) Act, which went into effect earlier this year, has brought about some significant changes to FIRPTA withholding rates. These changes affect all real estate transactions that close on or after February 16, 2016.

While the nuances of the law are complicated, the basic changes to the rates are as follows:

Withholding rate is 0% - if the amount realized (the purchase price) does not exceed $300,000, and the buyer meets IRS residency requirements.
Withholding rate is 10% - if the amount realized is greater than $300,000 but less than $1,000,000, and the buyer meets IRS residency requirements.
Withholding rate is 15% - if the amount realized exceeds $1,000,000 without regard to IRS residency requirements.

Buyers and sellers should rely on professional legal or tax advisors for the nuances of these issues, however, as a real estate professional, you should know that this information MUST be relayed to all buyers who are purchasing a U.S. real estate interest from a foreign seller so that they can withhold adequate funds. If they do not withhold adequate funds, the buyers could find themselves liable for extra withholdings.

There are other factors involved in this process that can affect both buyers and sellers. It is advised they contact a tax or legal professional with any questions regarding FIRPTA.

Barbara Pronin is an award-winning writer based in Orange County, Calif. A former news editor with more than 30 years of experience in journalism and corporate communications, she has specialized in real estate topics for over a decade.