FIRPTA withholding increases to 15%: What it means for foreign real estate investors

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FIRPTA withholding increases to 15%: What it means for foreign real estate investors

FIRPTA withholding increases to 15%: What it means for foreign real estate investors: Recently, the U.S congress made changes to the U.S Foreign Investment in Real Property Tax Act of 1980 better known as “FIRPTA”. The policy changes just like other ones before it will affect the real estate community positively and negatively. Experts have predicted that two of these policy changes will benefit the real estate community while the third one will impact foreign sellers of certain properties.

What is FIRPTA and What purpose it serve?

FIRPTA was created by congress to checkmate the foreign investors that were buying off real estate in U.S without paying taxes back to United States government. Therefore FIRPTS was created to force this type of investors to withhold ten percent of the purchase price and remit the same to the IRS at the time of closing, although it is subjected to few exceptions.

In most cases, the party that withholds the fund is the settlement agent who will remit the same funds to the IRS; however the responsibility to remit the fund falls entirely on the buyer.

According to Ralph W. Holmen (Associate general counsel for the National Association of Realtors); the new FIRPTA rules made by the congress is aimed at making U.S commercial property more attractive to foreign investors. Going further, the new policy will double the maximum amount of stock owned by a foreign investor in a U.S publicly-traded real estate investment trust (REIT). It increased this rate from the current 5% to the new 10%. The policy will as well allow foreign pensions funds to own real estate investment trusts (REITs).

The new FIRPTA rule also affect foreign sellers negatively, it rules that effective February 17, 2016 that there will be an increase in the withholding tax that are paid by the foreign sellers of certain properties.

Congress calls this new policy “Protecting American Taxpayers from Tax Hikes (PATH) Act (H.R 2029). This policy is estimate to increase foreign investment in United States commercial real estate by $20 – $30 billion every year according to Holmen. But as part of measure to finance the two provisions made to boost investment in real estate, congress added an increase in the FIRPTA withholding rate from 10% to 15%.

Here is how the new withholding works

The new policy takes into consideration 3 levels of property purchases which include:

  • A personal residence of $300,000
  • A personal residence that worth more than $300,000 but less than $1,000,000.
  • Properties worth over $1 million.

For the property that worth $300,000 or less

As far as the property will be used as a residence, the foreign sellers will pay no FIRPTA tax.

For the property that worth over $300,000 but less than $1 million

As far as the property will be used as residence, the new changes do not apply for such property.

For the property worth a $1 million or more

The new policy increases the tax paid by property owners under this range from the current 10% to 15% effective after Feb. 17, 2016 whether the property will be used as residence or not.

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