Major changes to U.S. rules on sales of U.S. real estate property

On December 18, 2015, the U.S. Congress passed the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”). President Obama has since signed the PATH Act so it is now enacted law. The PATH Act contains significant reform measures for the rules governing Real Estate Investment Trusts (“REITs”) and non-U.S. investors in U.S. real estate.

Generally-speaking, the new rules are expected to encourage foreign investment in U.S. real estate. The PATH Act broadens certain exemptions under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) which is expected to facilitate greater foreign investment activity in U.S. real estate, particularly by REITs and foreign/non-U.S. Pension Plans.

It should be noted that FIRPTA subjects non-U.S. investors to U.S. federal income tax on dispositions of “U.S. real property interests” – which generally includes actual ownership of U.S. real property (including through partnerships), as well as shares of “U.S. real property holding corporations” (“USRPHCs”).

FIRPTA Withholding Tax Rate Increased to 15% (from 10%)

Unless an exemption applies or a clearance certificate has been approved by the Internal Revenue Service (“IRS”), a U.S. federal withholding tax of 10% generally applies to the purchase price on the sale of U.S. real property interests by non-U.S. persons. If the withholding tax exceeds the foreign seller’s U.S. tax liability, the seller may claim a refund of the withholding tax by filing a U.S. income tax return.

Although the changes to FIRPTA are generally positive in providing greater flexibility to certain foreign investors in acquiring U.S. real estate, it is important to note that the FIRPTA withholding tax rate is increased to 15% (from 10% previously) for tax dispositions occurring 60 days after the date of the enactment of the PATH Act for investors that do not meet the exceptions noted above.

Conclusion

Although the PATH Act generally contains positive changes which should promote greater foreign investment in U.S. real estate, it is important for non-U.S. persons who own U.S. real estate (e.g., U.S. vacation properties) to understand the implications arising from the changes to the FIRPTA regime (e.g., the increase in the FIRPTA withholding rate).

If you are intending on selling U.S. real property in the future, (e.g., a Florida condominium), it is important that you consult with your professional tax advisor to understand how FIRPTA and the recent changes will apply to your particular facts and circumstances.

Henry Korenblum MBA, CFP, CPA, CA

CPA (Illinois)

Henry Korenblum is a manager in Kestenberg Rabinowicz Partner’s Tax Group. If you have any questions relating to this article, we encourage you to contact Henry at hkorenblum@krp.ca or 905.946.1300.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.