This is an excerpt from the presentation; Advanced Tax Planning for Foreign Investors in United States Real Estate includes FIRPTA update. Presented by Richard S. Lehman to the Florida Realtors Global Networking Forum.
Effective February 16, 2016 FIRPTA general withholding rate increases from 10% to 15% effective for closings on or after February 16, 2016 in the United States. Closing agents should adjust their procedures and forms to reflect this change.
The 10% rate will still apply for those transactions in which the property is to be used by the Transferee 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.
Here Are Your New FIRPTA Guidelines:
- If the amount realized (generally the sales price) is $300,000 or less, and the property will be used by the Transferee as a residence (as provided for in the current regulations), no sums need to 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 Transferee as a residence (there are no regulations that specifically address these changes but many as assuming you can follow the current regulations for the $300,000 exception), 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 Transferee.
The well-documented flaws and risks of the $300,000 exemption will likely continue although future regulations could change existing procedures. The Transferee’s intent to use the property as a residence should be documented as best they can and point out to the Transferee the risks of allowing the exemption to apply to their transaction.
Under the law, the Transferee is the withholding agent and is responsible for withholding and remitting the proper amount to the I.RS. Taxpayers should also be alert for situations where the foreign Transferor forces the Transferee to claim residence status merely to lower the withholding rate, since the Transferee 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 closing scheduled on or after February 16, 2016 should be added to change the potential rate of withholding to 15%.
Do you have a question about the FIRPTA updates?
Ask Tax Attorney Richard S. Lehman Esq. Fill out the form below or call him at 561-368-1113.