Prior to the PATH Act of 2015 (“Protecting Americans from Tax Hikes 2015”, effective 12/18/2015), if the seller of real property is a foreign person, Federal law required buyers to withhold 10% of the gross sale price and provide it to the IRS. With the implementation of the PATH Act, this 10% tax requirement has been altered. Effective February 16, 2016, the 10% withholding tax will be increased to 15%. Meaning, if you are a foreign person selling U.S. real property, 15% of the gross sales price of that property will go to the IRS in the form of a tax.
There are a number of exclusions that must be noted: first, if the transaction has a sales price of $300,001 to $1,000,000 AND the property is meant as the buyer’s principle residence (according to the IRS, a principle residence requires: “you or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant”), then the 10% tax requirement remains. Second, for transactions of $300,000 or less, AND the property is to be the buyer’s principle residence, there are NO tax withholdings due to the IRS under Foreign Investment in Real Property Tax Act (hereinafter “FIRPTA”). Other circumstances that are exempt from paying this FIRPTA withholding tax to the IRS include: if a non-foreign affidavit is provided by the seller, if a withholding certificate is granted to the seller by the IRS, if the amount realized by the seller is zero (zero gain or compensation), and if the property is purchased by the U.S. government or a political subdivision. Therefore, all transactions where the property is NOT meant to be the buyer’s principle residence (at any sales price) will require the new 15% withholding to the IRS.
*NOTE: According to the IRS, a foreign person is a “…nonresident alien individual, foreign corporation, foreign partnership, foreign trust, a foreign estate, and any other person that is not a U.S. person. It also includes a foreign branch of a U.S. financial institution if the foreign branch is a qualified intermediary. Generally, the U.S. branch of a foreign corporation or partnership is treated as a foreign person”.*