Under the provision of the Foreign Investment in Real Property Tax Act (FIRPTA), the buyer is required to withhold from a foreign seller and pay to the IRS a tax based on the sales price upon the sale of any U.S. real property. On December 18, 2015, the Protecting Americans from Tax Hikes (PATH) Act was signed into law by Congress increasing the withholding rate from 10% to 15% for transactions closing on or after February 18, 2016.
Not all transactions will fall under the 15% rule. There are some exceptions:
- If the sales price is less than $300,000 and the buyer intends to occupy the subject property, the withholding rate is 0% (unchanged from prior use).
- If the sales price is more than $300,000 but less than $1,000,000 and the buyer intends to occupy the subject property, the withholding rate is 10%.
All other transactions will be subject to the new withholding rate of 15% unless the foreign seller has obtained a written Determination of Reduced or Waived Withholding from the IRS.
In any event, the buyer must sign an Affidavit of facts which certifies the buyer’s intent to occupy and the price paid for the property.
Here is a quick reference chart for appropriate withholding tax rate under PATH:
In other aspects, the FIRPTA changes will entice foreign buyers. According to National Association of Realtors (NAR), cross-border investment in U.S. real estate totaled approximately $104 billion in 2015, up from $92 billion in 2014.