New FIRPTA Changes

The Foreign Investment in Real Property Tax Act, commonly known as FIRPTA, was originally enacted by Congress in 1980. Congress created FIRPTA based on reports that non-U.S. investors (investors without a social security number) were purchasing U.S. real estate and then selling it at a profit without paying any U.S. taxes.

As a result, FIRPTA required buyers to withhold 10 percent of the purchase price (on homes over $300,000) and remit it to the Internal Revenue Service at the time of closing, subject to a few exceptions. Since the non-U.S. investors do not have a social security number the settlement agent could not report a 1099 with their earnings. Since the 10% IRS withholding is considerably more than what the investor would be liable for it is safe to say the investor will now report the transaction so that he could request the portion of the 10% that belongs to them.

The settlement agent is the party that withholds and remits the funds to the IRS, but it is ultimately the buyer’s legal responsibility.

Recently Congress made changes to FIRPTA. The most significant change is that properties subject to withholding are now categorized into 3 categories.

  1. Personal Residence of $300,000 or less. Non-U.S. investor currently pays no FIRPTA tax. This does not change with new rule.
  2. Personal Residence between $300,000 and $1 million. Non-U.S. investor currently pays 10% FIRPTA tax. This does not change with new rule as long as the property is used as a residence.
  3. Personal Residence over $1 million. Effective Feb 16 the new rule changes the FIRPTA tax from 10% to 15% whether the property is used as a residence or not.

However, a non-U.S. investor can avoid the 10% or 15% withholding altogether by applying for a withholding certificate, with the IRS, prior to closing. This certificate establishes the actual amount of tax the non-U.S. investor is liable for allowing the investor to pay the tax itself at closing instead of the general withholding amount.

As always, please feel free to contact me at 305-567-2499 should you have any questions.