The recently enacted Protecting American Taxpayers from Tax Hikes (PATH) Act includes two very positive FIRPTA provisions that are conservatively estimated to boost foreign investment in U.S. commercial real estate by $20-$30 billion per year. However, as part of a package of tax changes to “pay for” the two provisions, Congress also included an increase in the FIRPTA withholding rate from 10% to 15%. It should be noted that residences purchased from foreign persons will not be affected by the higher withholding rate unless the purchase price exceeds $1 million.
WHAT IS FIRPTA?
FIRPTA is the Foreign Investment in Real Property Tax Act of 1980. This legislation was enacted as a result of widespread concerns that foreign investors were purchasing U.S. real estate and then selling it at a profit without paying any tax to the United States. To solve the problem, FIRPTA established a general requirement on the purchaser of real estate interests owned by a foreign seller to withhold 15% of the purchase price and remit it to the Internal Revenue Service at the time of closing unless certain exceptions are met. Usually, the settlement agent is the party that withholds and remits the funds to the IRS, but the buyer is legally responsible. In certain circumstances, the buyer’s agent can also be held liable.
How does the New Law Specifically Change the Withholding Requirement?
The provision increases the rate of withholding from 10% to 15% except in the case of sales of residences intended for personal use by the acquirer, if the purchase price does not exceed $1 million.
Thus, if the previous exception for personal residences (where the purchase price does not exceed $300,000 – in which case no withholding is required) does not apply, the 10% withholding rate is retained so long as the purchase price does not exceed $1 million. If the price is higher than $1 million, the new 15% rate will apply.
In summary, here are some guidelines:
- If the amount realized (generally the sale 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 amount realized 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 amount realized exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the buyer.
What Beneficial Changes for FIRPTA Were Included in the PATH Act?
The new law makes two changes to the FIRPTA law, both of which are expected to make U.S. commercial property more attractive to foreign investors without substantially eroding the original purpose of the Act.
First, the law doubles the maximum amount of stock ownership that a foreign investor may have in a U.S. publicly-traded real estate investment trust (REIT) from the previous limit of 5% to 10%.
Second, the new law permits certain foreign pension funds to invest in real estate investment trust (REITs) without having FIRPTA treatment apply.
FOR MORE INFORMATION PERTAINING TO FIRPTA, PLEASE CONTACT:
Evan M. Liddiard, CPA, NAR Government Affairs: firstname.lastname@example.org. 202-383-1083
Finley Maxson, Senior Counsel, NAR Legal Department: email@example.com. 312-329-8381