FIRPTA Witholding Rate Set to Increase in February

US tax form 1042, foreign person's US source income subject to Witholding

When a foreigner is involved in a real estate transaction, it is important to be mindful of the Foreign Investment Real Property Tax Act (or “FIRPTA”). FIRPTA was passed in 1981, and requires foreign persons to pay U.S. income tax on gains made from selling real estate in the United States. Interestingly, the duty is on the BUYER to deduct and withhold a portion of the sales price and report the sale to the IRS. Most settlement agents provide this service on behalf of the buyer in connection with the closing, and it is important to verify that your settlement agent understands FIRPTA and its withholding requirements.

FIRPTA was recently changed as part of the yearend tax extension legislation signed into law by President Obama late last year. Starting on February 16, the following are the new FIRPTA withholding guidelines:
  1. If the amount realized (generally the sales price) is $300,000 or less AND the buyer will use the property as his/her residence, no withholding is required.
  2. If the amount realized exceeds $300,000.00, but does not exceed $1,000,000.00 AND the buyer will use the property as his/her residence, then the withholding rate is 10% of the full amount realized.
  3. If the amount realized exceeds $1,000,000.00, then the new withholding rate is 15% on the entire amount, regardless of the buyer’s use of the property.
  4. On all other transfers by a foreign person, the new withholding rate is 15% on the entire amount, regardless of the purchase price.
The current FAR/BAR contract does not yet address the possibility of 15% withholding under the new rules, and as such, the contract provision will need to modified on a case by case basis for all transactions over $1,000,000.00 until the form is amended.

The use of the $300,000.00 exemption to avoid withholding can be risky to a buyer if not handled properly, and there are other situations in which withholding under FIRPTA can be avoided. For these reasons, we strongly encourage you to use a real estate lawyer with experience in addressing FIRPTA, including the most recent changes to the law.

Berlin Patten Ebling, PLLC
Article Authored by Evan Berlin
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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