The Protecting Americans from Tax Hikes Act of 2015 (the 2015 Path Act), signed into law on December 18, 2015, increased the rate of withholding from 10% to 15% on disposition of US real property by non-US citizens, residents or Green Card holders under the Foreign Investment in Real Property Act of 1980 (FIRPTA). The new regime does not apply (the 10% withholding requirement still remains) on sale of a principal residence with a purchase price of $1 million or less and to which the exemption for a residence bought for $300,000 or less does not apply.
The new provision becomes effective on transfers after February 16, 2016.
Under FIRPTA, gain or loss realized by a non-resident alien on sale of US real property interest is subject to income tax withholding. A buyer of the US real property generally has a duty to withhold 10% (newly 15%) of the gross sales proceeds at the time of sale and remit it to the IRS within a narrow time window.
In contrast, if a US or foreign partnership with foreign partners sells US real property, the buyer is not required to withhold on sale. Instead, it becomes a responsibility of the partnership to hold back tax on the amount realized by the foreign partner. Partnerships are now too required to withhold at the rate of 15% instead of the former 10%. The same an additional 5% increase also applies to US corporations, US or foreign estates or trusts.
The mechanisms to reduce or eliminate withholding requirements still exist if certain criteria are met.
Other significant FIRPTA amendment relates to an increase in the maximum stock ownership, held directly or indirectly, by a foreign shareholder in a publicly traded US real estate investment trust (REIT). Under the new law, the ownership threshold in a REIT increases from 5% to 10% for purposes of being FIRPTA exempt. As long as the percentage ownership threshold does not exceed 10%, any distributions attributable to gain from sales or exchanges of US real property in a REIT are treated as a dividend rather than as FIRPTA gain.
If the above changes apply to you and you need assistance, please feel free to contact us here.