On February, 18 of 2016, PATH act was finally signed to include several provisions:
- Protection of American Tax Payers from Tax Hikes.
- Extended retroactively over expired tax provisions.
- Included FIRPTA provisions.
What is the policy and political factors of FIRPTA and why do we have it?
Before FIRPTA (Foreign Investment in Real Estate Tax Act), many foreign owners of US Real Estate were not subject to tax on gains when selling. FIRPTA was enacted to establish equity of tax treatment between foreign and domestic Real Estate Owners. However, it has long been US policy to welcome foreign investment of stocks, bonds, treasury securities by not taxing capital gains. In late 1970s, an increased foreign investment in US real property started alarming most Americans. It became a national topic of discussion that 60 minutes aired a story about it only to ignite an avalanche of letters to Congress demanding something to be done.
The law was first introduced to make disposition of US real property interest by foreign person subject to withholding (disposition is a sale, exchange, gift, etc.) where the buyer was required to withhold a portion of amount realized (generally the selling price). So what has changed from then to now?
I would say “good news” for US commercial Real estate: the change Increased max holdings of foreign investor in US REIT from 5% to 10% without triggering FIRPTA. It allowed foreign pension funds to invest in US real estate without triggering FIRPTA.
Not so much great news for residential Real Estate, but……
There are three level of property purchase the law considers in the ruling:
- Personal residence worth $300,000 or less: foreign sellers currently pay no FIRPTA tax, and this does not change if the property will be used as a residence.
- Personal residence worth over $300,000 to $999,999: the current 10% FIRPTA tax does not change under the new rule if the property will be used as a residence.
- Personal property worth $1 million-plus: the FIRPTA tax rises from the current 10% to 15%. In this $1 million plus category, it doesn’t matter whether or not the property will be used as a residence. However, there is a possibility of reduced rate.
There are several other rules and specific regulations a seller and buyer of US Real Estate has to comply with. Our advice is to hire professionals specializing in this field to help you navigate through the process from start to finish. The mistake observed on regular basis a foreign national investing in our market makes is either speak, consult or hire the wrong person thinking that anyone who holds a license knows the subject well.
Investing in US Real Estate is an exciting venture and a rewarding vehicle to grow wealth when it’s done right. So keep investing, and keep growing!
Call our office or send us a request for more information on the new FIRPTA changes and what you should plan for.
You can reach us at:
email@example.com or call us at 407-574-5920
Written by Mona L. Cherkaoui
International Real Estate Advisor, Speaker, and Trainer