New FIRPTA rules affecting taxation of real estate held by foreign investors

The Protecting Americans from Tax Hikes (PATH) Act of 2015 signed into law Dec. 18, 2015, included significant changes to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Notably, the new legislation increases the general withholding rate to 15 percent from 10 percent for dispositions on or after Feb. 17, 2016. In addition, effective Dec. 18, 2016, revised FIRPTA rules apply to real estate investment trusts (REITs) and foreign pension funds.

New withholding regime on sales of real estate by foreign persons

In general, FIRPTA withholding applies to the disposition of US real estate—and, more broadly, to dispositions of investments in US real property—by non-US persons. Under prior law, the buyer was required to withhold 10 percent from the gross sales proceeds owed to the foreign seller.

For transactions occurring on or after Feb. 17, 2016, new FIRPTA withholding rules will apply. If the amount realized:

  • does not exceed $300,000 and the buyer intends to use the property as personal residence, no withholding is required (this provision remained unchanged by the PATH Act).
  • is between $300,000 and $1 million and the buyer intends to use the property as a personal residence, the withholding rate is 10 percent.
  • exceeds $1 million the withholding rate is 15 percent, regardless if the buyer intends to use the property as a personal residence.

As it is the buyer’s or the closing agent’s responsibility to remit the tax withheld to the IRS, your real estate practitioner should be aware of the new rules affecting withholding rates. A foreign seller can reduce or eliminate FIRPTA withholding by timely applying for a withholding certificate – Form 8288-B.

Changes to FIRPTA affecting REITs and foreign pension funds

The PATH Act also introduced amendments to the FIRPTA rules governing the taxation of REITs and their foreign shareholders. The new rules make it easier for foreign investors to enjoy exemption from the FIRPTA rules, which can now be applied to non-US persons owning up to 10 percent interest in a publicly traded REIT (5 percent under prior law). Furthermore, the new provisions mitigate adverse tax consequences for foreign pension funds investing in US real estate, making them now exempt from FIRPTA rules, granted certain requirements are met.

For more information on this topic, or to learn how Baker Tilly international tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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