February 26, 2016

FIRPTA Withholding Changes

The withholding requirements under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) have recently changed.

On Dec. 18, 2015, President Barack Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (the “Act”), which makes several important changes to the taxation of foreign investment in real estate.

Under FIRPTA, foreign investors are generally subject to U.S. tax and withholding on dispositions of U.S. real property interests (“USRPIs”). FIRPTA requires a person who buys real property from a foreign person to withhold a portion of the seller’s proceeds at closing. Until the recent change, FIRPTA withholding was generally 10%. Effective after February 17, 2016, the amount that has to be withheld has changed for certain transactions. When the sales price exceeds $1 million, the buyer must now withhold 15% of the sales price.

Specifically FIRPTA withholding now requires:

  • If the sales price is $300,000 or less, AND the property will be used by the buyer as a residence, 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 buyer.

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