When foreign owners of real estate go to sell, are they taxed the same way a U.S. citizen is? Not exactly, but as a result of the Foreign Investment in Real Property Tax Act (FIRPTA), buyers of such property are often required to withhold part of the sales proceeds and submit them to the Internal Revenue Service as a method to prompt selling foreign owners of real property to file a U.S. tax return.
FIRPTA has been around for a long time and many REALTORS® are aware of the withholding requirement. However, the Protecting Americans from Tax Hikes Act (PATH Act) of 2015 included several changes to the FIRPTA rules.
For REALTORS® representing sellers and buyers of foreign-owned real estate, here is what you need to know: The provision increased the rate of withholding from 10% to 15% except in the case of sales of residences intended for personal use by the buyer, if the purchase price does not exceed $1 million.
Thus, if the previous exception for personal residences (where the purchase price does not exceed $300,000 – in which case no withholding is required) does not apply, the 10 percent withholding rate is retained so long as the purchase price does not exceed $1 million. If the price is higher than $1 million, the new 15 percent rate will apply.
Here are some easy guidelines:
- If the amount realized (generally the sales price) is $300,000 or less, AND the property will be used by the buyer as a residence, no sums need be withheld or remitted.
- If the amount realized exceeds $300,000 but does not exceed $1,000,000, AND the property will be used by the buyer as a residence, then the withholding rate is 10% on the full amount realized.
- If the amount realized exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the buyer.
When assisting high-end foreign sellers, it’s safe to anticipate their surprise when hearing about the increase in withholding rate, and you should be prepared to explain the basics of the change. If you are selling a home for a foreigner and the home is subject to FIRPTA, you will want to inform the buyer and buyer’s agent that your client is a foreigner and what withholding could apply. This is especially important since the buyer is responsible for withholding the funds and remitting them to the IRS.
The changes described above were enacted to help pay for two other FIRPTA provisions also included in the PATH Act. These provisions were designed to make the U.S. more attractive to foreign investors and buyers. Experts estimate that they will boost foreign investment in U.S. commercial real estate by $20-$30 billion per year. These changes include:
- Doubling the maximum amount of stock ownership that a foreign investor may have in a U.S. publicly-traded real estate investment trust (REIT) from the previous limit of 5% to 10%.
- Permitting certain foreign pension funds to invest in real estate investment trusts (REITs) without having FIRPTA treatment apply.
Understanding the recent changes are just one small piece of the FIRPTA puzzle. Knowing FIRPTA’s full history, the exceptions, your liability as a REALTOR® and a checklist of do’s and don’ts (for both buyer and seller agents) can set you up for success. This information can be found in NAR’s recent webinar on FIRPTA featured below.