FIRPTA Changes, will boost investments of REIT and the withholding tax increases from 10% to 15% for properties 1 million and plus

What is FIRPTA?

Congress created FIRPTA “Foreign Investment in Real Property Tax Act” based on reports that foreign investors were purchasing U.S. real estate and then selling it at a profit without paying any U.S. taxes. Consequently, FIRPTA created a requirement forcing buyers to withhold 10 percent of the purchase price and remit it to the Internal Revenue Service at the time of closing, subject to a few exceptions.

Usually, the settlement agent is the party that withholds and remits the funds to the IRS, but the buyer is legally responsible, in certain circumstances, the buyer’s agent can also be held liable.”

Current Changes:

Congress recently made changes to the U.S. Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). While two changes should benefit the real estate community, a third will impact foreign sellers of certain properties

On the positive side, new FIRPTA rules will make U.S. commercial property more attractive to foreign investors. The law doubles the maximum amount of stock ownership a foreign investor may have in a U.S. publicly-traded real estate investment trust (REIT), bumping it up from the current 5 percent to 10 percent. It also permits certain foreign pension funds to invest in real estate investment trusts (REITs) without having FIRPTA treatment apply. This change to FIRPTA provision is conservatively estimated to boost foreign investment in U.S. commercial real estate by $20-$30 billion per year

On the other hand, the new FIRPTA rules increase the withholding tax paid by foreign sellers of certain properties effective Feb. 17, 2016 from 10 percent to 15 percent on properties valued one million dollars plus.

How new withholding works

The law considers three levels of property purchases: A personal residence of $300,000 or less; a personal residence worth more than $300,000 but less than $1 million; and properties valued at $1 million or more:

  • $300,000: Foreign sellers currently pay no FIRPTA tax, and this doesn’t change under the new rule, providing the property will be used as a residence
  • $300,000-$1 million: The current 10 percent FIRPTA tax does not change under the new rule, providing the property will be used as a residence
  • $1 million-plus: The FIRPTA tax goes up from the current 10 percent to 15 percent after Feb. 16. In this $1 million-plus category, it doesn’t matter whether the property will be used as a residence or not

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