NATNews Blog > February 2016 > What You Should Know about Foreign Clients and FIRPTA

    What You Should Know about Foreign Clients and FIRPTA

    2/26/2016 1:26:19 PM
    By Chalese Leven

    The United States continues to be a desirable location to own real estate for people from all corners of the globe. In a recent survey of Association of Foreign Investors in Real Estate (AFIRE) members, 60 percent responded that the U.S. was the country providing the most stable and secure real estate investments. By comparison, Germany, which came in second, had only 19 percent of the vote. With the increase in foreign buyers and sellers, it is important to understand what might be the impact on your clients of the recent changes in Foreign Investment in Real Property Tax Act of 1980, otherwise known as FIRPTA.
     
    For background, FIRPTA is the federal law that requires the withholding of settlement funds from a real estate settlement where the seller (individual or entity) is a “foreign person.” According to the Internal Revenue Code, a “foreign person” is defined as a person who is:
    • Not a U.S. citizen
    • Not a U.S. national
    • Does not hold a “green card” or meet the “substantial presence” test to be treated as a resident alien
    Recently, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (Path Act) into law. The Path Act includes important changes to the FIRPTA. These changes increase the FIRPTA general withholding rate from 10 percent to 15 percent (of gross sales price) effective for closings that occur on or after Feb.16, 2016.
     
    The following are changes to FIRPTA effective Feb. 16, 2016:

    1. For properties being acquired by the transferee not for use as a residence, 15 percent of the gross sales price must be withheld.

    2. For properties being acquired by the transferee for use as a residence, the following withholding rates apply:
    1. If the gross sales price is $300,000 or less, withholding is not required.
    2. If the gross sales price is greater than $300,000, but not more than $1 million, 10 percent of the   gross sales price must be withheld.
    3. If the gross sales price is greater than $1 million, 15 percent of the gross sales price must be withheld. 
     
    For a property to be considered a residence, the buyer or a member of the buyer’s family “must have definite plans” to reside at the property for at least 50 percent of the number of days the property is used during the first two years following the date of transfer. Days when the property is vacant are not taken into account in determining the number of days such property is used by any person.
     
    Projections reveal that the amount of foreign investor transactions will continue to increase in 2016. According to the recent AFIRE survey, 64 percent of respondents say they expect to have modest or major increases in their investment in US real estate in 2016. Another 31 percent say they expect to maintain or reinvest their investments. No one plans to see a major decrease.
     
    As always, we are here to help you stay informed on these regulatory changes.
     
    For more information, visit www.afire.org. 
     
    Reprinted with permission from RISMedia. ©2016. All rights reserved.