QUESTION
I am a mortgage broker and I recently had a transaction
adjourn at the closing because the seller of the property did not understand
their obligations under the Foreign Investment in Real Property Tax Act. As this caused my client to lose their rate, I was hoping you could provide an
explanation about this Act so that I could potentially avoid a reoccurrence of
this situation.
ANSWER
The Foreign Investment in Real Property Tax Act of 1980,
known by its acronym FIRPTA (“Act”), is a federal law enacted to ensure that
"foreign persons" who sell property in the United States generally
pay the same amount of federal taxes on the sale as a United States person
would. For purposes of the Act, a foreign person is anyone who is neither a
resident alien (i.e., a holder of a green card) nor a United States
citizen.
Towards this goal, the Act requires that whenever the seller
of a real property interest in the United States (viz., a “United States Real
Property Interest” or "USRPI") is a foreign person, the purchaser
must withhold a certain percentage of the gross sale proceeds (generally the
purchase price of the USRPI) upon disposition of the USRPI. The purchaser must
then submit the withholding to the IRS. This all helps ensure that federal
taxes are actually paid on the sale by the foreign seller. Pursuant to the Act,
withholding has been imposed at a rate of 10% of the gross sales proceeds of a
USRPI, notwithstanding the fact that the actual amount of tax may exceed (or be
less than) the amount withheld.
Recently, the Protecting Americans from Tax Hikes Act of
2015 ("PATH") was passed which, among other things, made changes to
the withholding requirements of FIRPTA. More specifically, for the sale of
a USRPI exceeding $1 Million Dollars, PATH raises the withholding amount from
10% to 15% of the gross sales proceeds. USRPI that are (i) personal
residences and (ii) have gross sales proceeds of $1 Million Dollars or less are
not affected by PATH and remain subject to the 10% withholding rate set forth
in FIRPTA (note that FIRPTA still does not require the 10% withholding under
certain conditions where the gross proceeds are $300,000 or less and the buyer
is an individual acquiring the property as a personal residence).
The new provisions under PATH affect the disposition of
USRPI taking place after February 16, 2016.
Important Tip:
If the actual federal tax liability on the sale of a USRPI
is less than the amount withheld, a foreign seller may be entitled to receive a
refund from the IRS after filing a federal tax return. Alternatively, a
foreign seller may seek to apply for a Withholding Certificate from the IRS
prior to the closing that would instruct the purchaser to withhold an amount
less than the required withholding amount of 10% or 15% (depending on the gross
sales proceeds). In transactions where the seller is not a foreign person, the
purchaser may request that the seller sign a certificate (viz., a FIRPTA Certificate)
at the closing stating that the seller is not a foreign person and that there
is no withholding obligation under the Act. If the seller signs a FIRPTA
certificate, the purchaser will not be required to withhold a portion of the
sale proceeds.
Neil Garfinkel
Executive Director/Realty Compliance Group
Director/Legal & Regulatory Compliance
Lenders
Compliance Group
