IRS Issues Changes to FIRPTA Filings Withholding Rules

When selling U.S. real estate, property owners who are foreign nationals or entities must adhere to certain rules under the Foreign Investment in Real Property Act (“FIRPTA”). The IRS withholding rules under FIRPTA have changed as of February 16, 2016:

Withholding Rates

The withholding rate for the sale of real estate owned by foreign nationals has been increased to 15 percent on the total amount realized on the disposition of the property. An exception is made for the sale of primary residences with a purchase price under $1 million.

The amount realized is the total of:

• Cash paid (principal);
• Fair market value of any other property transferred; and
• Amount of any liability assumed by the transferee before or after the transfer.

If the property was jointly owned by a U.S. citizen and a foreign national, the amount realized is allocated according to the capital contribution of each investor.

If a foreign corporation owned the property, the corporation must withhold a tax equal to 35% of the gain it realizes on the distribution to shareholders.

There are a number of exceptions from FIRPTA withholding that apply, including:

The buyer purchases the property for use as a personal residence and the sale price is less than $300,000.The purchaser or a family member is required to live in the home for at least 50% of the time during the first two years after the transfer date. A reduced withholding rate may be obtained if the buyer is purchasing the property for use as a personal residence and the sale price exceeds $300,000 (but is less than $1 million).

If the seller obtains a qualifying statement from the IRS that he or she is either:

• Exempt from the tax;
• Entitled to a reduced withholding amount;
• Has adequate funds to pay the tax; or
• Has arranged with the IRS to pay the tax.

If the seller certifies that he or she is not a foreign national and provides the buyer with a U.S. taxpayer identification number.

If the property sold belongs to a U.S. corporate entity. There may be other withholding taxes due however upon distribution if the shareholder is a foreign entity or foreign national.

The IRS may grant the seller a withholding certificate that excuses or reduces the withholding. This can only be obtained if the withholding amount exceeds the actual capital gain tax liability.

Foreign Pension Exemption

The FIRPTA withholding tax no longer applies to the sale of U.S. property that is either held directly or indirectly through a partnership, or to distributions received from a real estate investment trust (“REIT”), by a qualified foreign pension fund or a foreign entity that is owned by a foreign pension fund.