To motivate foreign sellers to file the required income tax returns and to pay the appropriate taxes, the United States Congress passed the Foreign Investment in Real Property Tax Act (“FIRPTA”) in 1980. This law has now been substantially changed through the “Protecting American form Tax Hikes Act of 2015” which was signed into law by President Obama in December 2015.
Up to now, the law required that the Buyers of Real Estate (or their Agents, such as a Title Company or Law Office performing the closing) withhold 10% of the amount realized (usually the contract price) and remit same to the Internal Revenue Service. This general rule has now been changed and the withholding percentage has been increased to 15% for any closing that will take place after February 16, 2016.
When the amount realized does not exceed $300,000 and the buyer (or his family) uses the real estate as a residence (as defined in the regulations), there continues to be no requirement to withhold and remit. If the amount realized is between $300,000 and $1,000,000 and the residence requirement is met, then only 10% must be remitted.
Notwithstanding the foregoing, it is still possible to obtain a Withholding Certificate where the seller proves to the IRS that the amounts withheld are substantially higher than the taxes that will ultimately have to be paid. This, however, requires diligence in the application process as there is only a limited time window to accomplish this task.
This Article is not intended to provide legal advice and is intended for general information purposes only.