Good news for the U.S. commercial real estate industry: The Protecting American Taxpayers from Tax Hikes (PATH) Act includes two very positive FIRPTA provisions that are conservatively estimated to boost foreign investment in U.S. commercial real estate by $20-$30 billion per year.
However, as part of a package of tax changes to “pay for” the two provisions, Congress also included an increase in the FIRPTA withholding rate from 10 percent to 15 percent. It should be noted that residences purchased from foreign persons will not be affected by the higher withholding rate unless the purchase price exceeds $1 million.
What is FIRPTA?
FIRPTA is the Foreign Investment in Real Property Tax Act of 1980. This legislation was enacted as a result of widespread concerns that foreign investors were purchasing U.S. real estate and then selling it at a profit without paying any tax to the United States. To solve the problem, FIRPTA established a general requirement on the purchaser of real estate interests owned by a foreign seller to withhold 10 percent of the purchase price and remit it to the Internal Revenue Service at the time of closing unless certain exceptions are met.
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. Under the FIRPTA law, there is no withholding requirement if the sales price does not exceed $300,000 and the residence is intended for the buyer’s personal use. Properties between $300,000 and $1 million are subject to a 10 percent withholding tax. Now, with the 2016 changes to FIRPTA, properties over $1,000,000 are subject to the 15% withholding tax.
How will commercial property benefit?
First, the new law doubles (from 5 percent to 10 percent) the maximum amount of stock ownership that a foreign investor may have in a U.S. publicly-traded real estate investment trust (REIT). Second, the new law permits certain foreign pension funds to invest in REITs without having FIRPTA treatment apply.
What are your FIRPTA withholding obligations?
If you represent either the buyer or a seller of real property that is subject to FIRPTA withholding, you could find yourself liable for the tax that should have been withheld by the buyer in certain circumstances.
If the buyer of the real property receives a certificate from the seller that the seller is not a foreign person, and is therefore exempt from withholding, and you as the agent for either the seller or the buyer have knowledge that the certificate is false, you must notify the buyer of this fact. Failure to do so could mean that you, as the agent, are liable for the tax that should have been withheld but was not (limited to the amount of commission earned).
In addition, if you as an agent serve as a “withholding agent,” you may be personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus interest and penalties.
Evan M. Liddiard, CPA
Senior Policy Representative, Federal Taxation
NAR Government Affairs
NAR Legal Department