On December 18, 2015, the Protecting Americans from Tax Hikes Act (the Act) was signed into law. Among other items, the Act materially amends the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) to increase the withholding tax rate from 10 to 15 percent effective February 16, 2016. Under FIRPTA, generally, a U.S. buyer is required to withhold an estimated tax from the gross proceeds of the U.S. real property interest purchased from a foreign seller. It should be emphasized the withheld amount is not an additional tax on the foreign seller. Rather, it is an estimated payment against the tax ultimately imposed on gain from the sale. If the U.S. income tax on the sale is less than 15 percent, the foreign seller will be entitled to a refund.
Given the increased withholding tax rate, it is important to plan ahead. For instance, a reduced rate of withholding may be permitted upon submission and acceptance by the IRS of a Withholding Certificate (IRS Form 8288-B). In addition, the IRS provides a list of exemptions from FIRPTA withholding. One of the most common exemptions applies if the property will be used as a personal residence, and the total sales price does not exceed $300,000. To be a personal residence, generally, the buyer or his or her family must have definite plans to reside at the property for at least 50 percent of the time occupied during each of the two years after the sale.
Note, however, the 10 percent FIRPTA withholding rate continues to apply to U.S. real property to be used by the buyer as a personal residence, provided that the amount realized does not exceed $1 million.