FIRPTA: Non-US Persons with Real Property will be Impacted this year (2016) by the PATH Act
Ines Zemelman, EAFeb-05-2016
The PATH Act of 2015 has been signed and is scheduled to go into effect on or around February 16, 2016.
President Barack Obama signed the PATH (Protecting Americans from Tax Hikes) Act of 2015 into effect on December 18, 2015. The act will be in effect as of mid-February, 60 days after having been signed. There are certain amendments in the PATH Act which affect Non-US Persons holding real property in the United States. Provisions in the PATH Act increase the FIRPTA (Foreign Investment in Real Property Tax Act of 1980) tax from 10% to 15%.
What is the Real Property and how it’s different from the Real Estate?
Real estate is simply a piece of land plus any improvements that are attached or have been added. Examples of natural attachments to the land include trees, valuable mineral deposits and oil – anything that would normally be considered part of the land. Artificial improvements include buildings, sidewalks and fences.
Real property includes real estate with a bundle of rights to use the property as the owners see fit. This way, real property consists of both physical objects and common law rights; real estate only consists of physical objects.
Disposition of real estate by the non-US persons always implies giving up of common law rights associated with this investment. This is why FIRPTA definition is ultimately accurate and applies to Real Property, not just the Real Estate.
The FIRPTA tax is imposed upon Non-US Citizens when they dispose of any real property in the United States.
If you are a Non-US Citizen holding real property in the United States (this includes options or interest in US property which is not owned only as a creditor), you will be required to pay taxes on any capital gains which you receive from the property. To ensure that the tax is collected by the US DOT (Department of Treasury), the buyer of the US property is required to hold 15% and send this amount to the IRS as withheld taxes.
Withholding amount may be excessive - but the only way to get the refund is by filing your US income tax return as a Non-Resident.
As a Non-Resident of the United States, you are required to file a US income tax return if your income exceeds certain thresholds. Tax rate that you actually owe is most likely lower than a super-conservative 15% FIRPTA withholding. By filing a US income tax return, you may be eligible to receive back the part if the amount that was withheld from the sale of U.S. located real property.
The PATH Act also offers complete exemption from qualifying foreign pension funds.
In an effort to kick start the amount of incoming investments of foreign money in real property located in the United States, the PATH Act has a special exemption for certain foreign pension plans. The Path Act stipulates that qualified foreign pension funds investing in U.S. real estate will be completely exempt from FIRPTA withholding.