New FIRPTA Rules Drive Withholding Rates Higher

Tuesday, February 02, 2016 by Aryeh Lazarus, Esq.

According to the IRS,

"The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 10 percent of the amount realized on the disposition (special rules for foreign corporations). In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent"

Withholding is required unless an exemption applies.  FIRPTA withholding rates are among the many matters affected by the Protecting Americans From Tax Hikes Act of 2015 (the "PATH Act") which was signed into law on December 18, 2015. For transactions closing on or after February 16, 2016, Section 324 of the PATH Act changed some FIRPTA withholding rates. As of such date, applicable withholding rates are as follows:

To determine whether withholding is necessary, transferees may still rely on a Certification of Non-Foreign Status or affidavit signed under oath by the transferor/seller if the transferee does not have actual knowledge or notice that the information in the certificate or affidavit is false.

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