On December 18, 2015, President Barack Obama signed the Protecting Americans from Tax Hikes Act of 2015, or the PATH Act, into law. Beginning on February 16, 2016, the PATH Act amends FIRPTA (the Foreign Investment in Real Property Tax Act of 1981) to require a buyer of a real property interest owned by a foreign person (a non-resident alien individual, foreign corporation, foreign partnership or foreign trust or estate) to withhold 15 percent of the amount realized to pay U.S. income tax to the IRS. Currently, the amount to be withheld is 10 percent of the amount realized. However, the increase is only applicable in situations in which the purchase price exceeds $1,000,000. Further, dispositions of real property under $300,000 remain exempt from tax withholding under FIRPTA so long as the real property will be used by the transferee as its residence (refer to the IRS regulations for the parameters of what constitutes a residence). Therefore, if the price of a U.S. real property interest is between $300,000 and $1,000,000, and the real property will be used by the buyer as its residence, the 10 percent FIRPTA withholding rate is still applicable. The burden to withhold the tax under FIRPTA rests with the buyer. Thus, if the seller is a foreign person or entity and the tax is not withheld, the buyer may be held personally liable for the tax. Sellers can mitigate the impact of FIRPTA by applying to the IRS for a withholding certificate which may determine that a lesser amount is due to the IRS.
The hike to a 15 percent withholding rate under FIRPTA places an obvious increased burden and responsibility on buyers of a real property interest in excess of $1,000,000. Buyers and settlement agents acting on behalf of buyers need to be vigilant in identifying the foreign status of a seller in order to ascertain FIRPTA’s impact on a specific transaction. Further, in order to be eligible for the residence tax exemption mentioned above, buyers must be assured that the buyer has properly confirmed in writing its intent to use the subject property as its residence.
The PATH Act also implemented changes with regard to taxation of real estate investment trusts, U.S. and foreign pension funds and regulated investment companies. For more comprehensive detail regarding the regulations, exemptions and transferees affected by these changes, please refer to the FIRPTA regulations contained in the Internal Revenue Code, as amended by H.R. 2029. Each situation, taxable entity or real estate transaction requires an independent analysis of the consequences of the applicable changes in the law.