Foreign national sellers withholding increases from 10% to 15% but exceptions apply

THIS IS AN INFORMATIONAL BULLETIN AND NOT TAX ADVICE. CUSTOMERS AND CLIENTS ARE ADVISED TO CONTACT THEIR RESPECTIVE TAX PROFESSIONALS FOR TAX ADVICE

Foreign nationals selling US real estate may face an increase in their FIRPTA (Foreign Investment in Real Property Tax Act) withholding tax percentage paid at the closing table.

Effective 2-16-16,  the withholding amount has been increased from 10% to 15% unless a sale is exempt.  Here is a handy reference chart for realtors and sellers:

Illustrative Chart – Withholding Percentage of Gross Sales Price

*2nd or vacation homes may apply; consult a CPA

FIRPTA Withholding on real estate sales by foreign sellers

The Foreign Investment in Real Property Tax Act (FIRPTA), 26 U.S.C. § 1445, has long required a purchaser of real estate in the U.S. from a non-resident foreign seller to withhold a percentage of the gross sales price to secure payment of the applicable U.S. Income Tax.   Subject to certain exceptions, the base amount to generally be withheld has historically been ten percent (10%) of the gross sales price.

“PATH  ACT ” Increases  10%  withholding to 15% of the gross  sales price on certain sales

In December 2015, new legislation known as the Protecting Americans from Tax Hikes Act of 2015 (“PATH ACT”) has changed the FIRPTA withholding amount effective February 16, 2016. Section 324 of the PATH ACT changes the base FIRPTA withholding rate to fifteen percent (15%).

The exemption still applies for sales up to and including $300,000 with intent to occupy the property as a residence

The existing exemption from ANY withholding, where the purchaser will occupy the land as a residence and the gross sales price is $300,000.00 or less will still apply.  The purchaser has to intend to occupy the property as his/her residence for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of purchase.

15% withholding applies for sales up to and including $300,000 and purchaser does not intend to occupy the property as a residence

If the gross sales price is $300,000.00 or less and the purchaser does not intend to occupy the property as a residence, then the 15% withholding rate applies.

10% withholding applies for sales between $300,000 and $1,000,000 with intent to occupy as a residence

When the purchaser intends to use the property as a residence and the gross sales price is greater than $300,000.00 but no more than $1,000,000.00, the withholding rate shall be 10% of the gross sales price. The purchaser has to intend to occupy the property as his/her residence for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of purchase.

15% withholding applies for sales in excess of $300,000 when the purchaser does not intend to occupy the property as a residence

If the gross sales price exceeds $300,000.00 and the purchaser does NOT intend to occupy the property as a residence, then the 15% withholding rate applies.

No further IRS regulations/forms at this time

At present the IRS has not issued any regulations with regard to the above referenced changes to FIRPTA. Nor, has it issued any new regulations as to criteria for the intended use of the property as a primary residence, occasional residence, or exclusive residence. We anticipate that the IRS will be revising their forms as may be necessitated by these FIRPTA changes.

Sellers may continue to apply for a withholding certificate to reduce their liability at closing using a qualified and experienced Certified Public Accountant. Our office recommends Monte Gordon, CPA mgordon@cbh.com  About Monte Gordon

At the time of this posting, the Internal Revenue Website section on FIRPTA has not been updated to reflect these changes but Underwriter Bulletins on the issue have been issued to all title agents and closing attorneys to implement the order.

Disclaimer: The Closing Company, Inc. is not a law firm and is not providing legal or tax advice in this blog post.  For legal advice, please consult with a licensed Attorney. For tax advice, consult with a Certified Public Accountant. Hiring an attorney is an important decision which should not be based solely on advertising. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

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Click here for sample intent to reside affidavit