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FIRPTA Withholding Changes - Effective 2-16-2016 PDF Print E-mail

DATE:      March 14, 2016

TO:          Massachusetts Agents and Approved Attorneys

FROM:     Massachusetts Underwriting Department

RE:          FIRPTA Withholding Changes - Effective 2-16-2016

                Underwriting Bulletin No. 01-2016-MA

 

PLEASE NOTE: This is an informational bulletin and not tax advice.  Agents are advised to have their customers and clients contact their respective tax professionals for tax advice.

 

FIRPTA Withholding on Real Estate Sales by Foreign Sellers

The Foreign Investment in Real Property Tax Act (FIRPTA), 26 U.S.C. § 1445, has long required a purchaser of U.S. real property from a non-resident foreign seller to withhold a percentage of the amount realized to secure payment of the applicable federal income tax.  Subject to certain exceptions, the amount to be withheld has historically been ten percent (10%) of the gross sales price*. 

 

"PATH ACT" Increases 10% Withholding to 15% of the Amount Realized On Certain Sales

In December 2015,  new legislation known as the Protecting Americans from Tax Hikes Act of 2015 ("PATH ACT") changed the FIRPTA withholding requirements, as well as further defining terms, such as "transferee", "transferor", "*amount realized" and "occupancy"; these changes became effective on February 16, 2016.  Notably, Section 324 of the PATH ACT changes the base FIRPTA withholding rate to fifteen percent (15%).

 

Defined Terms

Withholding amounts vary depending upon whether the transferee (purchaser) is an individual or a partnership, trust, corporation or other entity; the same goes for the transferor (seller).  Occupancy by the purchaser affects the withholding amount and is a very specifically defined term.  And while we generally think of the gross sales price as the figure on which to base the applicability of FIRPTA and the amount withheld, "amount realized" is the defined term, and includes the amount of any liability assumed by the transferee (e.g. a mortgage) or to which the U.S. real property interest is subject immediately before and after the transfer (e.g. a sewer betterment).

 

The Exemption Still Applies for Sales up to and Including $300,000, with New Requirements

The existing exemption from ANY withholding, in which the purchaser will occupy the land as a residence and the amount realized is $300,000.00 or less, will still apply.  The purchaser must intend to occupy the property as his/her residence for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of purchase.  However, this exemption only applies if the purchaser is an individual, even if it is acquired for an individual; otherwise, the new withholding rate of 15% applies.

 

15% Withholding Applies for Sales up to and Including $300,000 and Purchaser Does NOT Intend to Occupy the Property as a Residence

If the amount realized is $300,000.00 or less and the purchaser does not intend to occupy the property as a residence, then the 15% withholding rate applies.


10% Withholding Applies for Sales between $300,000 and$1,000,000 With Intent to Occupy as a Residence

When the purchaser intends to use the property as a residence and the amount realized is greater than $300,000.00, but no more than $1,000,000.00, the withholding rate shall be 10% of the gross sales price.  The purchaser must intend to occupy the property as his/her residence for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of purchase. Again, however, this exemption only applies if the purchaser is an individual, even if it is acquired for an individual; otherwise, the new withholding rate of 15% applies.

 

15% Withholding Applies for Sales in Excess of $300,000 When the Purchaser Does NOT Intend to Occupy the Property as a Residence

If the amount realized exceeds $300,000.00 and the purchaser does NOT intend to occupy the property as a residence, then the 15% withholding rate applies.

 

Seller is Not a Natural Person

Entities which are subject to Section 1445(e), such as domestic or foreign corporations, qualified investment entities, trusts, and estates, may be subject to a withholding amount of 35% of a distribution to a foreign beneficiary or 35% of a recognized gain on the distribution of a U.S. real property interest to foreign shareholders.

 

For reference, please see Instructions for Form 8288 (Rev. February 2016), and revised  Form 8288 and Form 8288a.  We also invite you to visit www.irs.gov/form8288.

  

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we wish to inform you that, unless expressly stated otherwise, any purported U.S. tax information contained in this communication (including any attachments) is not intended or written to be relied upon or used, and cannot be relied upon or used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 

 

 
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