Legal Line Question: Recent Changes to FIRPTA

January 21, 2016

Q: I am a licensed real estate broker and I am representing a seller who is not a citizen of the United States. The seller and I would like to know what "FIRPTA" is and how it affects the sale.  Additionally, I have heard that "FIRPTA" was recently amended.  Can you clarify that as well

A: FIRPTA, which is an acronym for the Foreign Investment in Real Property Tax Act of 1980, is a federal law enacted to ensure that "foreign persons" who sell property in the United States generally pay the same amount of federal taxes on the sale as a United States person would. For purposes of FIRPTA, a foreign person is anyone who is neither a resident alien (i.e. a holder of a green card) nor a United States citizen. 

Towards this goal, FIRPTA requires that upon the disposition of any real property interest in the United States by a foreign person (a "United States Real Property Interest" or "USRPI") the purchaser of the USRPI must withhold a certain percentage of the gross sales proceeds (which is generally the purchase price of the USRPI) and submit the withholding to the IRS. This ensures that federal taxes are actually paid on the sale by the foreign seller. FIRPTA withholding has been imposed at a rate of 10% of the gross sales proceeds of a USRPI, notwithstanding the fact the actual amount of tax may exceed (or be less than) the amount withheld. 

Recently, the Protecting Americans from Tax Hikes Act of 2015 ("PATH") was passed which, among other things, made changes to the withholding requirements of FIRPTA.  More specifically, for the sale of a USPRI exceeding $1 Million Dollars, PATH raises the withholding amount from 10% to 15% of the gross sales proceeds.  USPRI that are (i) personal residences and (ii) have gross sales proceeds of $1 Million Dollars or less are not affected by PATH and remain subject to the 10% withholding rate set forth in FIRPTA (note that FIRPTA still does not require the 10% withholding under certain conditions where the gross proceeds are $300,000 or less and the buyer is an individual acquiring the property as a personal residence).

The new provisions under PATH affect the disposition of USPRI taking place after February 16, 2016.

Important Tip: If the actual federal tax liability on the sale of a USPRI is less than the amount withheld, a foreign seller may be entitled to receive a refund from the IRS after filing a federal tax return.  Alternatively, a foreign seller may seek to apply for a Withholding Certificate from the IRS prior to the closing that would instruct the purchaser to withhold an amount less than the required withholding amount of 10% or 15% (depending on the gross sales proceeds).  Please see our previous Legal Line Question of the Week on FIRPTA Certificates for further analysis of this topic.

Please note that PATH also provides for several other detailed modifications to FIRPTA relating to real estate investment trusts ("REITs").  These modifications were previously reported by REBNY and can be found by clicking this link.

By: Neil B. Garfinkel, 

REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP