ASHINGTON – Jan. 19, 2016 – Congress recently made changes to the U.S. Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). While two changes should benefit the real estate community, a third will impact foreign sellers of certain properties.

On the positive side, new FIRPTA rules will make U.S. commercial property more attractive to foreign investors, according to Ralph W. Holmen, associate general counsel for the National Association of Realtors® (NAR). The law doubles the maximum amount of stock ownership a foreign investor may have in a U.S. publicly-traded real estate investment trust (REIT), bumping it up from the current 5 percent to 10 percent. It also permits certain foreign pension funds to invest in real estate investment trusts (REITs) without having FIRPTA treatment apply.

On the other hand, the new FIRPTA rules increase the withholding tax paid by foreign sellers of certain properties effective Feb. 17, 2016.

"The recently enacted Protecting American Taxpayers from Tax Hikes (PATH) Act (H.R. 2029) includes two very positive FIRPTA provisions that are conservatively estimated to boost foreign investment in U.S. commercial real estate by $20-$30 billion per year," writes Holmen. "However, as part of a package of tax changes to 'pay for' the two provisions, Congress also included an increase in the FIRPTA withholding rate from 10 percent to 15 percent."

How new withholding works

The law considers three levels of property purchases: A personal residence of $300,000 or less; a personal residence worth more than $300,000 but less than $1 million; and properties valued at $1 million or more:

  • $300,000: Foreign sellers currently pay no FIRPTA tax, and this doesn't change under the new rule, providing the property will be used as a residence
  • $300,000-$1 million: The current 10 percent FIRPTA tax does not change under the new rule, providing the property will be used as a residence
  • $1 million-plus: The FIRPTA tax goes up from the current 10 percent to 15 percent after Feb. 16. In this $1 million-plus category, it doesn't matter whether the property will be used as a residence or not

What is FIRPTA?