On December 18, 2015, the Protecting
Americans from Tax Hikes Act (PATH) was signed into law, amending, among
other things, the Foreign
Investment in Real Property Tax Act (FIRPTA). The most significant change
is that there has been an increase in the withholding rate from 10% to 15%. What this means is that the buyer’s attorney will
withhold 15% from the purchase price to a foreign seller and submit this amount
directly to the IRS. The foreign seller will
now walk away with 15% less (rather than 10%) from sales of U.S. real property interests
but may be entitled to a refund, at least in part, if its income tax is less
than the 15% that was withheld from the purchase price.
The increase to 15% also applies to distributions by certain
domestic corporations to foreign shareholders and distributions by domestic or
foreign partnerships, trusts, or estates. However, the 10% withholding rate
still applies to personal residences that have a purchase price of less than $1
million.
The increased withholding tax rate ensures tax compliance by
a foreign person or entity by offsetting any tax owed on a sale of real
property. Planning ahead can allow a foreign seller to either reduce
the time that the withheld funds are held in escrow, or eliminate the
requirement to withhold any sale proceeds.
The seller’s attorney can make an application to the IRS for
a Withholding
Certificate, requesting a reduction in the percentage withheld from the
sale, based upon a showing that the seller’s maximum tax liability is below 15%
of the purchase price. If this Withholding Certificate is approved, the buyer’s
attorney, instead of the IRS, holds the funds in escrow; which can greatly
expedite the seller’s access to the funds. Alternatively, a foreign seller may be
exempt from withholding all together. This determination depends upon a list
of reasons; a common reason is if the property is a personal residence and
the purchase price is $300,000 or less.
The increased withholding tax rate is effective for
dispositions occurring on or about February 16, 2016, which is 60 days after PATH
was signed into law.
