On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) as part of the Consolidated Appropriations Act, 2016. The new PATH Act reforms the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Changes to FIRPTA include increased withholding generally and a new residential withholding threshold. These and other PATH Act changes are predicted to encourage increased foreign investment in United States commercial real estate.
FIRPTA is a tax law that requires foreign persons to pay United States income tax on gains made from selling United States real estate. The duty is on the purchaser of the foreign person’s real estate to withhold a portion of the sale price and report the sale to the IRS. The reforms of the PATH Act changed required withholding amounts. Withholding is not required for residential transfers with a purchase price of less than three hundred thousand dollars ($300,000.00). Ten percent (10%) of the purchase price must be withheld for residential transactions between three hundred thousand dollars ($300,000.00) and one million dollars ($1,000,000.00). Fifteen percent (15%) of the purchase price must be withheld for all other nonexempt real estate sales. The new withholding amounts will begin to take effect February 16, 2016.
Other portions of FIRPTA are unaffected by the PATH Act changes. For example, exemptions to FIRPTA withholding including furnishing a nonforeign affidavit, qualifying statement, regularly traded stock, and wash sales were not altered and foreign sellers are still able to obtain a refund of excess amounts withheld upon request.
The withholding amount change will be incorporated in updated FAR/BAR contracts beginning next month so the increase to fifteen percent (15%) will not be easily forgotten.