Examples of New FIRPTA Withholding Rates Applied

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How Much Will Your Foreign Seller Need to Withhold – 0%, 10%, 15%?

As noted in our January 16, 2016 blog, the FIRPTA withholding rates for real estate sales by foreign persons for closings on or after February 17, 2016 will change in certain instances.  For some foreign sellers, the current $300,000 exception could still apply and there would be no FIRPTA withholding at closing.  For other foreign sellers, the FIRPTA withholding could remain the current 10% of the gross sales price.  However, for some unlucky foreign sellers, the FIRPTA withholding could increase from the current 10% to 15% of the gross sales price.

This blog will provide you with examples applying the revised FIRPTA withholding rates for those transactions closing February 17th or later.  For purposes of this blog, let’s assume that the seller is a foreign person subject to FIRPTA withholding.  In addition, we will be assuming that the Internal Revenue Service’s use of the term “residence” is being used in the same manner as for the $300,000 or less withholding exception since currently the Internal Revenue Service has not provided any further guidance regarding same.

Mr. Foreign Seller is selling property to Mr. Snowbird for the purchase price of $200,000.00.   Mr. Snowbird has definite plans to occupy the property for 6 months and rent it out 2 months for the first two 12 month periods.  Mr. Snowbird will sign the appropriate affidavit at closing.  How much is withheld?  Answer:  No withholding is required since the purchase price is $300,000 or less, and Mr. Snowbird will occupy the property for 6 out of the 8 months that the property is occupied for the first 2 years satisfying the withholding exemption.

What if the same set of facts but the buyer is Happy Corporation, Inc., a Florida corporation?  How much is withheld?  Answer:  15% of the gross sales price is withheld at closing since the buyer must be an individual for the withholding exemption to apply.

Mr. Foreign Seller is selling property to Mr. Homestead for the purchase price of $500,000.00.   Mr. Homestead intends on occupying the property as his homestead residence and will sign the appropriate affidavit at closing.  How much is withheld?  Answer:  10% of the gross sales price is withheld at closing.   What if Mr. Homestead becomes Mr. Uncooperative at closing and refuses to sign the affidavit at closing.  How much is withheld?  Answer:  15% of the gross sales price.

Mr. Foreign Seller is selling a mansion to Mr. Moneybags for the purchase price of $3,000,000.00.  Mr. Moneybags intends on occupying the property as his homestead and will sign anything you put in front of him.  How much is withheld?  Answer:  15% of the gross sales price is withheld for any sales price exceeding $1,000,000.00 regardless if the property will be the buyer’s residence.

These are just a few examples and since every fact pattern is unique, we urge you to consult with a real estate attorney experienced with FIRPTA to discuss how the latest changes will affect your foreign seller.

Sincerely,

Berlin Patten Ebling, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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