The Foreign Investment in Real Property Tax Act ("FIRPTA") imposes tax withholding, reporting and record retention obligations on buyers ("transferees") of U.S. real property interests when the seller is a "foreign person," i.e. a nonresident alien, foreign corporation or other entity, etc. Withholding is required unless an exemption applies.
Some underwriters caution closers that they are typically not agents of the seller or the buyer for purposes of FIRPTA, while at the same time recognizing that closers sometimes do withhold and report or prepare exemption affidavit forms as part of the closing process. Closing instructions may contain provisions that the settlement agent is responsible for any applicable FIRPTA reporting.
FIRPTA withholding rates are among the many matters affected by the Protecting Americans From Tax Hikes Act of 2015 (the "PATH Act") which was signed into law on December 18, 2015. For transactions closing on or after February 16, 2016, Section 324 of the PATH Act changed some FIRPTA withholding rates. As of such date, applicable withholding rates are as follows:
|Property||Amount Realized||Withholding Rate____|
|Not Transferee's Personal Residence*||Any||15% (Increased from 10%)|
|Transferee's Personal Residence*||Up to $300,000||0 (No Change)|
|Over $300,000 and up to $1,000,000||10% (No Change)|
|15% (Increased from 10%)|
To determine whether withholding is necessary, transferees may still rely on a Certification of Non-Foreign Status or affidavit signed under oath by the transferor/seller if the transferee does not have actual knowledge or notice that the information in the certificate or affidavit is false.
* Personal residence means the transferee or member of the transferee's family has definite plans to reside at the property at least 50% of the days the property is used by any person during each of the first two 12-month periods after closing.