Listing Agents should familiarize their foreign sellers with the new withholding requirements under F.I.R.P.TA.
Recent changes, specifically Section 324 of House Resolution 2029 passed by Congress and signed by the President amended Internal Revenue Code Section 1445 by increasing the rate of withholding of tax for foreign sellers on the sale of U.S. real estate.
Commencing February 16, 2016, any non-resident alien (foreign) seller who sells an interest in U.S. real property will now be subject to withholding 15% of the gross sales price. This is an increase from the current rate of 10%. The change does not alter the present individual capital gain tax rate for foreigners which ultimately is computed at 20% of the net gain subsequently realized upon sale.
However, this change does alter the amount to be held in escrow at closing to 15% when an application for reduced withholding is submitted on or before the date of closing. If an application is not made, then the 15% of the gross sales price must be remitted to the I.R.S. within twenty days of closing and a U.S. tax return must be filed reporting the sale. Unfortunately, if the latter process is used depending upon what time of the tax year the property is sold, it may take a seller up to 18 months to receive a refund.
Please note that the previous 10% withholding rate will still apply for those transactions where the sales price is one million or less and the buyer agrees to sign an affidavit stating their intention to use the property primarily for residential purposes during the first two years of ownership. The Buyer must be an individual and cannot be a Corporation, Limited Liability Company or a Partnership. For all other instances, the new rate of 15% will apply.
The New Guidelines to be Aware of are as Follows:
If the sales price is $300,000.00 or less, AND the property will be used by the buyer as a residence (as provided for in the current regulations), and the buyer signs an affidavit affirming this fact, no sums need be withheld or remitted.
If the sales price exceeds $300,000.00 but does not exceed $1,000,000.00, AND the buyer signs an affidavit the property will be used by the buyer as a residence (there are no regulations that specifically address these changes but it is understood you can follow the current regulations for the $300,000.00 exemption), then the withholding rate is lowered from 15% to 10% of the gross sales price, provided the sale is $1,000,000.00 or lower.
If the property is vacant land or commercial property or if the amount realized exceeds $1,000,000.00, then the withholding rate will always be 15% on the entire amount, regardless of use by the Buyer.
Antennas should go up if a foreign seller seeks to force the buyer as a condition of closing, to claim the purchase is for residential purposes (if it is not) to lower the withholding rate as the buyer will remain liable for any additional withholding tax, penalties and interest if the I.R.S. challenges the buyer’s intent.
When buyers are purchasing from foreign sellers it is important they understand their purchase just became more complicated as they unwittingly have taken on the burden of being the traffic cop for the I.R.S. If the rules are not strictly complied with the buyer is the party responsible for the penalties.
To minimize the potential tax burden, foreign sellers, now more than ever, should apply for a reduced withholding certificate prior to closing. Over the past 25 years, our office has processed approximately 750 applications for a reduced withholding sum for foreign sellers. Should you have any questions, please feel free to contact us.