The Foreign Investor in Real Property Tax Act (“FIRPTA”) plays an important role in the amount of taxes that must be withheld and paid to the IRS when a foreign investor sells its property. On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) which amended some of the FIRPTA withholding provisions. The following is a summary of some of these amendments:
- Increase from 10% to 15%: Unless an exemption or reduced rate applies, the withholding amount has been increased from ten percent (10%) to fifteen percent (15%) of the sales price.
- Personal Residence Exemption: If both of the following conditions are met: a. the buyer is purchasing property that will be used as the buyer’s residence, and b. the sales price is $300,000 or less, then the buyer may elect to waive withholding under Section 1445(b)(5) of the Tax Code. This exemption and the requirements for such exemption are as they were prior to the enactment of the PATH Act.
- Reduced Rate of Withholding: If both of the following conditions are met: a. the buyer is acquiring property that will be used as the buyer’s residence, and b. the sales price is greater than $300,000, but not more than $1,000,000, then the buyer may elect to withhold a reduced withholding amount equal to ten percent (10%) of the sales price rather than the unreduced rate of fifteen percent (15%).
When dealing with a seller that is a foreign investor, it is important for the buyer to know that it is the buyer’s responsibility – not the foreign seller – to pay the correct amount of withholding to the IRS.