Two changes made to the U.S. Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) will go into effect February 17. While one affects foreign investment in publicly-traded real estate investment trusts (REITs) and should make commercial property in the U.S. more attractive to foreign buyers, the second one affects foreign buyers of residential properties.
The change relating to ownership of U.S. REITs is the doubling of the maximum amount of stock a foreign investor may have in REITs from 5% to 10% and allowing foreign pension funds to invest in REITs withoug having FIRPTA apply. Ralph W. Holmen, associate general counsel for the National Association of Realtors® (NAR) states that these changes “… are conservatively estimated to boost foreign investment in U.S. commercial real estate by $20-$30 billion per year'”.
In order to cover the costs associated with the two commercial provisions, the withholding amount for residential properties will increase from 10% up to 15% on properties that are over $1 million, whether it is used as a primary residence or not. For properties $300,000 or less or $300,000 to $1 million, the rules don’t change. Under $300,000, no FIRPTA tax is paid if it is to be used as a primary residence. From $300,000 – $1 million, the current 10% FIRPTA tax will not change as long as the property is used as a primary residence.
Buyers need to know that although most settlement agents do withhold the FIRPTA tax, if they do not, the buyer is the one that is legally responsible for the tax owed if it is not withheld.