Withholding of Tax on Dispositions of United States Real Property Interests
The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding the rates were amended as part of the PATH act of 2015.
FIRPTA authorised the United States to tax foreign persons on dispositions of U.S. real property interests.
A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations that are considered U.S. real property holding corporations.
Persons purchasing U.S. real property interests (“transferee”) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (a lower rate may apply under certain exceptions) of the amount realized (there are special rules for foreign corporations).
Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.
One of the most common exceptions to FIRPTA withholding is that the transferee (purchaser/buyer) is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his home and the purchase price is not more than $300,000 and the buyer signs the primary residence affidavit. However, buyers should be aware that while they may meet the withholding exemption they are still responsible for the seller’s tax liability, interest and penalties should the seller not file a US income tax return to report the sale and pay any relevant taxes.