Foreign Investment in Real Property Tax Act: Increase in Withholding Rate

Matthew Plummer - Bradenton Attorney

Matthew R. Plummer, Esq., Real Estate and Banking Law

Amanda C. Tullidge — Bradenton Attorney

Amanda C. Tullidge, Esq., Real Estate Law

Buyers and sellers of United States real estate should be aware of new changes to the Foreign Investment in Real Property Tax Act (FIRPTA) which affects closings occurring on or after February 16, 2016.

When a foreign seller disposes of a United States real property interest, FIRPTA requires the buyer to deduct and withhold a percentage of the amount realized by the seller on the sale. Under the prior version of the law, 10 percent of the amount realized from the sale was withheld. Under the new version of the law, the amount of withholding may increase to 15 percent based on the amount realized and whether the buyer plans to occupy the property as his or her residence. Please note that “residence” is strictly defined by IRS regulations and an attorney or tax professional should be consulted if the parties plan to claim an exemption or reduced withholding amount on this basis.

If the buyer intends to occupy the property as his or her residence and the amount realized is less than $300,000, then the parties continue to be exempt from FIRPTA withholding (see the commonly used exception below). If the buyer intends to occupy the property as his or her residence and the amount realized is greater than $300,000, but not over $1,000,000, the new 15 percent withholding rate will take effect.  Additionally, if the buyer does not intend to occupy the property as his or her residence, then the new 15 percent withholding rate will apply regardless of the amount realized on the sale.

EXCEPTIONS TO FIRPTA

Parties in transactions including foreign sellers should also be aware of FIRPTA’s application and its possible exceptions, which remain unchanged. The two most common exceptions are as follows:

1. The buyer does not need to withhold funds if the seller has already received a “Withholding Certificate” or “Qualifying Statement” from the IRS stating that seller is exempt from the withholding requirement or qualifies for a lower withholding rate. A foreign seller should work with their accountant to start this process early since obtaining this certificate can take several months.

2. As mentioned previously, the buyer will not need to withhold funds if the amount realized on the sale does not exceed $300,000, and the buyer intends to use the property as his or her residence (as defined by the IRS regulations). The buyer will be required to sign an affidavit to this effect at closing

FIRPTA withholding is not just critical for a foreign seller, but for the buyer in these transactions as well. While the closing agent typically collects and remits the withheld amount to the IRS, the buyer is the party held legally responsible for the remittance and any violation.

Since this law has such a significant effect on buyers and sellers, both parties in a FIRPTA transaction should fully understand the scope of FIRPTA, its possible exceptions, and the new legislative changes. If you are involved in such a transaction, we recommend seeking the advice of a qualified real estate attorney to discuss how these matters may affect you.

For more information on FIRPTA and real estate tax law, please call our office at 941.748.0100 or contact Matthew Plummer at mplummer@blalockwalters.com or Amanda Tullidge at atullidge@blalockwalters.com.