FIRPTA is the Foreign Interest In Real Property Tax Act and became law to force foreign sellers of U.S. real property to pay tax on gain from sales. Without FIRPTA changes, sellers would pocket the proceeds and remove themselves from the U.S. and its taxing jurisdiction. FIRPTA was designed to cause foreign sellers to file U.S. returns and report any gain.
The 2015 statute increased the withholding obligation imposed on buyers in a transaction where a seller is a foreign person. The ten percent (10%) rate is increased to fifteen percent (15%) in any transaction where the buyer is not acquiring a principal residence from a foreign seller. The fifteen percent (15%) rate also applies if the sales price of a principal residence exceeds $1,000,000.
Exceptions to the increased rate
There are two exceptions to the increased rate of withholding. Where a buyer acquires a principal residence from a foreign seller for a sales price over $300,000 and less than or equal to $1,000,000, the ten percent rate will continue to apply. The acquisition of a principal residence from a foreign person for a sales price of $300,000 or less will not require withholding consistent with past practice. Withholding is also not required if a Seller provides a Withholding Certificate from the IRS which excuses the withholding or the amount realized by the seller is zero.
The effective date is for all closings after February 15, 2016.
It is not uncommon for tax practitioners to uncover transactions where the Foreign Interests in Real Property have not been properly identified. A foreclosure on U.S. real property collateral securing a foreign loan, the arrangement may be subject to taxation under FIRPTA. Consistent with tax treaties, the sale of a real property is taxable by the host country. FIRPTA simply expands the definition to capture transactions that were designed to avoid U.S. tax.