The Foreign Investment in Real Property Tax Act was amended recently, with changes going into effect on February 17, 2016. Previously, when a foreign person or entity sold real property in the United States, the buyer was required to withhold 10% of the gross sales price. Beginning February 17, 2016, the amount required to be withheld increases to 15%. Under 26 CFR 1.1461 and 26 CFR 1.1445-6, if a buyer is required to withhold the tax from the seller and fails to do so, the buyer becomes responsible for the tax and any interest that accrues between the time the tax was due and when the buyer actually pays the tax. However, if the buyer obtains a withholding certificate from the Internal Revenue Service (IRS) that eliminates the withholding requirement and the seller fails to pay the tax, the buyer is not responsible for the tax. Either the buyer or the seller can apply for a withholding certificate.
Under the new requirements (that can be accessed here):
● If the sales price of the real property is less than $300,000 and the buyer intends to use the property as a residence, then no withholding is required.
● If the buyer intends to uses the property as a residence and the sales price is between $300,000 and $1,000,000 then 10% must be withheld.
● For any transactions over $1,000,000 or if the buyer is not purchasing the property to use as a residence, then 15% must be withheld.
● If the buyer is provided with an affidavit by the seller stating that the seller is not a foreign person and provides a U.S. tax ID number, then no withholding is required.