Real Estate Law – Foreign Investor In Real Property Transfer Act (FIRPTA) – Increases to 15% – January 15th, 2016
January 15th, 2016
Mr. Andrew Cuevas, Esq., is the President of Cuevas, Garcia & Torres, P.A., and Vantage Property Title Company. Cuevas, Garcia & Torres, P.A., provides legal services in the areas of Community Association Law, Real Estate law, and Business Immigration, including title insurance services through Vantage Property Title Company. If you have any questions regarding this article or any other questions, you may contact Mr. Cuevas at (305) 461-9500 or via e-mail at [email protected]. If you are interested in reading previous newsletters, please visit www.cuevaslaw.com, select the icon for Newsletters , and then choose the area of law you are interested in.
Foreign Investor In Real Property Transfer Act (FIRPTA) – Increases to 15%
Our law firm for over twenty years has been providing legal services to foreign investors with real estate transactions in the United States acting as settlement agents and title insurance agents for sales/purchases of residential and commercial properties. Therefore, the recent change in the FIRPTA regulations is important for our clients. Starting February 16, 2016, the FIRPTA rate will increase to 15% (instead of the 10% which exists today), in certain categories of transactions.
FIRPTA is a tax law passed in 1981 that requires foreign persons to pay U.S. income tax on the gains they make from selling U.S. real estate. The duty is on the U.S. national buyer (and not the settlement agent) to deduct and withhold a portion of the sales price and report the sale to the IRS. Buyers can withhold less than the statutory amount if they obtain a determination of the specific amount of tax owed by the foreign national using IRS Form 8288-B. In most cases, the settlement agent is the party that actually remits the funds to the IRS, but the buyer is held legally responsible. Additionally, until the tax is paid in full, the government obtains a security interest in the real property.
This will affect those sellers of property who might have their funds withheld and not available for reinvestment until a determination is made of the tax consequences of their transaction to sell a property in the United States. Unfortunately, the changes were part of the year-end tax extension legislation signed into law by President Obama on December 18, 2015.
The 10% rate will still apply for those transactions in which the property is to be used by the Buyer as a residence, provided the amount realized (generally the sales price) does not exceed $1,000,000, and the existing $300,000 “exemption” remains unaffected. So here are your new 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 (as provided for in the current regulations), 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 (there are no regulations that specifically address these changes but many are assuming you can follow the current regulations for the $300,000 exemption), 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.
The well-documented flaws and risks of the $300,000 exemption will likely continue although future regulations could change existing procedures. Settlement Agents of real estate transactions should document the Buyer’s intent to use the property as a residence as best they can and point out to the Buyer the risks of allowing the exemption to apply to their transaction. Under the law, the Buyer is the withholding agent and is responsible for withholding and remitting the proper amount to the IRS. Settle Agents also need to be alert for situations where the foreign Seller forces the Buyer to claim residence status merely to lower the withholding rate, since the Buyer could be liable for any additional withholding tax, penalty, and interest if their intent is ever challenged by the IRS.
The current FAR/BAR contract form contains language specifically referring to a 10% withholding. An amendment to the contract for closings scheduled on or after February 16, 2016 should be added to change the potential rate of withholding to 15%.
The remainder of the FIRPTA changes in the recent legislation involve REITS, but a new exemption from FIRPTA taxation and withholding is provided for qualified foreign pension funds. A new certification form likely will be needed to document the exemption.
This article is solely a partial explanation of all the issues related to the topic of this newsletter, and is not to be considered legal advice. The association should consult with its legal counsel to obtain explanations of all issues addressed herein and determine what procedures will most benefit your association.