Alert: FIRPTA withholding rate goes up effective today, February 16th

Foreign investors are generally not subject to US tax on US source capital gain unless it is effectively connected with a US trade or business, or it is realized by an individual who meets certain physical presence requirements. 

Gain from the disposition of a U.S. real property interest (USRPI), however, is treated as income effectively connected with a US trade or business under the Foreign Investment in Real Property Tax Act (FIRPTA). This FIRPTA gain is subject to tax and withholding under Code Sec. 897 and Code Sec. 1445. 

Stock or a beneficial interest in a US real property holding corporation (USRPHC) is a USRPI. 

Under pre-2015 PATH Act law, in the case of any disposition of a USRPI by a foreign person, the transferee was required to deduct and withhold at the rate of 10% of the amount realized on the disposition. 

Effective dispositions made on or after February 16, 2016, the new PATH Act increases the FIRPTA withholding rate to 15% on the dispositions of USRPIs and other prescribed transactions. 

However, the PATH Act provides for a reduced FIRPTA withholding rate of 10% in the case of a disposition of property which is acquired by the transferee for use by the transferee as a residence, and the amount realized for the property does not exceed $1,000,000, provided the exemption for a residence bought for $300,000 or less does not apply.

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Attention foreign investors in US real property! FIRPTA changes are coming

Few days ago Senate Finance Committee approved a Bill that would modify the FIRPTA – Foreign Investment in Real Property Tax Act. The affected foreign investors are primarily the shareholders of REIT – Real Estate Investment Trusts, however, the changes would also encompass other foreign investors in US real property.

Among other things the Bill if enacted would increase the FIRPA withholding tax under IRC 1445 from 10% to 15%. It would also impose additional reporting requirements than those exist now. For example, real estate brokers may also have a reporting requirements when they sell property owned by foreign investors!

It is important to monitor the development as it would significantly increase the burden on the withholding agents and buyers of the properties.

We at CPA Global Tax & Accounting are monitoring the developments and will post an update as soon as the Bill is finalized in its present form or with any changes. Please contact us (info@cpaglobaltax.com) if you need additional information about the provisions of the Bill.