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If you are a foreigner and decide to sell your property in the United States...


 FIRPTA retention increases to 15%


WASHINGTON - January 19, 2016 - Congress recently made changes to the US Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), the Property Tax Act of 1980. While two changes should benefit real estate investors, the third will have an impact for foreign sellers of certain properties.

On the positive side, the new FIRPTA rules will make US commercial properties more attractive to foreign investors, according to Ralph W. Holmen, general counsel of the National Association of Realtors of the United States (NAR). The law doubles the maximum number of shares a foreign investor may acquire in a publicly traded US real estate investment fund (REIT), changing from the current 5% to 10%. It also allows certain foreign pension funds to invest in real estate investment trusts (REITs) without FIRPTA enforcement.

On the other hand, the new FIRPTA rules increase the withholding tax paid by foreign sellers on certain real estate transactions, effective February 17, 2016.

"The newly enacted "Protecting American Taxpayers from Tax Hikes (PATH) (HR 2029)" law includes two very positive FIRPTA requirements that, in conservative thinking, are estimated to boost foreign investment in US commercial real estate by $20 to US $30 billion a year," Holmen wrote. "However, as part of the package of tax amendments to "pay the cost" of the two provisions, Congress also included an increase in the FIRPTA withholding rate from 10 percent to 15 percent."


How the new withholding works


The law considers three levels of real estate transactions: A personal residence of $300,000.00 or less; a personal residence worth more than US$300,000 and less than US$1 million; and properties over US$1 million:


• US$300,000.00: Foreign sellers currently do not pay FIRPTA, and this does not change with the new rule, as long as the property is used as a residence.


• $300,000.00 - $1,000,000.00: The current FIRPTA of 10 percent does not change under the new rule as long as the property is used as a residence.


•$1 million or more: In this category, above US$1 million, FIRPTA increases from the current 10 percent to 15 percent after February 16, regardless of whether the property will be used as a residence or not.


What is FIRPTA?

The US Congress created FIRPTA based on reports indicating that foreign investors were buying US real estate and selling it, at a profit, without paying any US taxes. Consequently, FIRPTA created a requirement, forcing buyers to withhold 10 percent of the sale value at the time of execution of the transaction, and transfer it to the Internal Revenue Service (IRS), subject to certain exceptions.

"Usually, the 'notary' processing the transaction is responsible for withholding and remitting the funds to the IRS, but the buyer is legally responsible," comments Holmen. "In certain circumstances, the buyer's broker may also be liable."



Florida Realtors® Association

© 2016 Florida Realtors®

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