by Jonathan H. (Jason) Warner
Effective Feb. 16, FIRPTA general withholding rate increases from 10% to 15%.
Recent federal tax legislation increases the FIRPTA general withholding rate from 10% to 15% effective for closings on or after February 16, 2016. Closing agents should adjust their procedures and forms to reflect this change. (If you want a reference, it is H. R. 2029, now known as Public Law 114-113. See Section 324 for text of changes).
The 10% rate will still apply for those transactions in which the property is to be used by the Transferee as a residence, provided the amount realized (generally the sales price) does not exceed $1,000,000, and the existing $300,000 “exemption” remains unaffected. So here are your new guidelines:
- If the amount realized (generally the sales price) is $300,000 or less, AND the property will be used by the Transferee as a residence (as provided for in the current regulations), no sums need be withheld or remitted.
- If the amount realized exceeds $300,000 but does not exceed $1,000,000, AND the property will be used by the Transferee as a residence (there are no regulations that specifically address these changes but many are assuming you can follow the current regulations for the $300,000 exemption), then the withholding rate is 10% on the full amount realized.
- If the amount realized exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the Transferee.
The well-documented flaws and risks of the $300,000 exemption will likely continue although future regulations could change existing procedures. Members should document the Transferee’s intent to use the property as a residence as best they can and point out to the Transferee the risks of allowing the exemption to apply to their transaction. Under the law, the Transferee is the withholding agent and is responsible for withholding and remitting the proper amount to the IRS. Members should also be alert for situations where the foreign Transferor forces the Transferee to claim residence status merely to lower the withholding rate, since the Transferee could be liable for any additional withholding tax, penalty, and interest if their intent is ever challenged by the IRS.
The current FAR/BAR contract form contains language specifically referring to a 10% withholding. An amendment to the contract for closings scheduled on or after February 16, 2016 should be added to change the potential rate of withholding to 15%.
The remainder of the FIRPTA changes in the recent legislation involve REITS, but a new exemption from FIRPTA taxation and withholding is provided for qualified foreign pension funds. A new certification form likely will be needed to document the exemption.