Changes to the Rules of FIRPTA
As of February 16, 2016, the Protecting Americans from Tax Hikes Act of 2015 signed into law by President Obama will set forth changes to the rules of FIRPTA. What is FIRPTA? FIRPTA is the Foreign Investment in Real Property Tax Act of 1980 and it applies to the income tax withholding a foreign person seller (“Transferor”) is subject to in connection with the disposition of a U.S. real property interest.
FIRPTA authorizes the United States to tax foreign persons on the sale or exchange of U.S. real property interests. Up until the new act, the purchaser (“Transferee”) had been required to withhold 10% of the amount realized (most times this is the purchase price) on a disposition if the transferor is a foreign person.
The changes can be easily understood as follows:
The new withholding rate is 15% of the amount realized. This change applies when the amount realized exceeds $1,000,000 regardless of whether the transferee will use the home as a primary residence or not. In all of these cases, reporting is required.
The withholding rate is 10% of the amount realized if it exceeds $300,000 but does not exceed $1,000,000 and the transferee will use the property as a primary residence. Reporting is required.
The withholding rate is 0% of the amount realized if it is $300,000 or less and the transferee will use the property as a primary residence. No reporting is required.
Lastly, the withholding rate is 15% of the amount realized if the transferee will not use the property as a primary residence. Reporting is required.
All other FIRPTA guidelines in connection with the disposition of a U.S. real property interest will continue to remain in place.