Effective February 16, 2016, recent changes to the Foreign Investment in Real Property Tax Act (“FIRPTA”) will require many buyers to withhold 15% of the purchase price when purchasing interests in real property from foreign sellers.
For those of you who don’t know, FIRPTA is a federal act requiring “foreign persons” to pay income tax on the amount realized from selling an interest in U.S. real property. When someone buys an interest in U.S. real property from a foreign person, FIRPTA requires the buyer to withhold a certain percentage of the purchase price to ensure the Internal Revenue Service (“IRS”) receives its share of taxes from the transfer. While the current laws and regulations require a buyer to withhold 10% in most instances, starting February 16, 2016, FIRPTA will require many buyers to withhold 15% of the amount realized by the foreign seller.
In the residential real estate market, the effect of this FIRPTA withholding rate increase is limited by two exemptions. The first exemption currently exists, while the second will come into effect with the legislative amendment. Currently, if a buyer purchases real property with the intent to use it as the buyer’s residence, and the foreign seller realizes an amount no greater than $300,000, then FIRPTA does not require the buyer to make a withholding. Similarly, the second exemption will limit the buyer’s withholding obligation to only 10% when the buyer intends to purchase real property to use as buyer’s residence, and the foreign seller realizes an amount greater than $300,000 but less than $1,000,000. ((Please note that these exemptions are based on the legislative amendment as currently written and may be subject to a different interpretation by the IRS if and when it decides to promulgate regulations on the issue.)
A violation of FIRPTA can come with steep penalties. Although the settlement agent typically handles the withholding, reports the transfer, and remits the necessary amount to the IRS, the responsibility and liability for all of these actions is on the buyer. Consequently, if the settlement agent forgets, or otherwise neglects to perform any one of these functions, it is the buyer who will bear the brunt of any penalties imposed by the IRS.
A Note to Realtors
For closings scheduled on or after February 16, 2016, the current FAR/BAR contract should be amended to provide that the FIRPTA withholding rate may be up to 15%.
If you ever need assistance with FIRPTA compliance, or have any questions about this post, please call us at (239) 344-1100. We would appreciate the opportunity to assist you.