Editor’s Note: Haute Lawyer partner and expert Real Estate Law attorney Robert Elias explains the withholding rate for foreign nationals on property sales imposed by FIRPTA.
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Florida lawyers and closing agents must withhold and remit more proceeds from the sale of real property by foreign nationals due to legislative changes that affect the Foreign Investment in Real Property Tax Act (commonly known as “FIRPTA”). Many property owners may not realize that changes took effect in 2016, particularly the widely overlooked rate increase.
FIRPTA essentially requires foreign persons to pay U.S. income tax on the gains they make from selling U.S. real estate. The duty is effectively on the buyer and closing agent to deduct a portion of the sales price and remit the withheld proceeds (and report the sale) to the Internal Revenue Service. The policy behind the law is to ensure foreign nationals file the required tax returns relating to property sales. Presuming that they do, and the actual tax is less than the amount withheld, the foreign person would be entitled to an appropriate refund.
Under the changes, the withholding rate for sales by foreign nationals increased from 10% of the total sales price to 15%. The increased withholding did not impact existing FIRPTA exemptions including the exemptions for sales under $300,000 for the sale of a primary residence or vacant land. Additionally, the current 10% withholding amount still applies to sales of primary residences where the sales price is less than $1 million.
Buyers can withhold less than the statutory amount only if they obtain, prior to the completion of the sale, a determination of the specific amount of tax owed by the foreign national using IRS Form 8288-B. This is commonly referred to as a “reduced withholding certificate”. While the closing agent is the party that actually remits the funds to the IRS, the buyer is held legally responsible to insure that it happens. Additionally, until the tax is paid in full, the government obtains a security interest in the real property.
Based on the updated law:
- If the amount realized (generally the sales price) is $300,000 or less, AND the property will be used by the buyer as a primary residence, the withholding rate is 0%.
- If the amount realized exceeds $300,000 but does not exceed $1 million, AND the property will be used by the buyer as a primary residence, the withholding rate is 10% on the full amount realized.
- If the amount realized exceeds $1 million, then the withholding rate is 15% on the entire amount, regardless of use by the buyer.
Buyers (and their closing agents) looking to take advantage of exemptions should document (under the penalty of perjury) the buyer’s intent to use the property as a residence. A buyer who fails to comply with FIRPTA could be liable for any additional withholding tax, as well as penalties and interest.
With certain exceptions and qualifiers, the FIRPTA withholding tax no longer applies to the sale of U.S. property that is either held directly (or indirectly through) one or more partnerships, to distributions received from a real estate investment trust (“REIT”), or held by a qualified foreign pension fund or a non-U.S. entity that is owned by a qualified foreign pension fund. Additionally, a publicly-traded REIT can assume that shareholders owning less than 5% of the REIT’s stock are U.S. persons unless the REIT has knowledge to the contrary.
The Elias Law Firm Can Help
If you have any questions about your Florida real estate transaction and/or FIRPTA withholding, feel free to contact The Elias Law Firm at 305-823-2300, via email at relias@eliaslaw.net, or visit us on the web at www.eliaslaw.net.
About the Author: Robert Elias, Esq. leads a boutique law firm specializing in all aspects of residential and commercial real estate transactions, corporate law, banking/lender representation, estate planning/probate, and asset protection. He is active in a variety of charitable and civic endeavors throughout South Florida and maintains an AV PreEminent Lawyer Rating from Martindale-Hubbell, the highest peer rating for professional excellence. Mr. Elias was named to the exclusive list of South Florida’s Top Rated Lawyers by American Lawyer Media.
