New Changes to FIRPTA Effective 2/16/16

New Changes to FIRPTA Effective 2/16/16

Signed into law on December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) made some significant changes to the federal income tax treatment of foreign real estate investors under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Effective February 16, 2016, these include:

Increases in Withholding

The withholding rate for the sale of real estate owned by foreign nationals has been increased from 10 percent to 15 percent of the gross proceeds. An exception is made for the sale of primary residences with a purchase price under $1 million.

Foreign Pension Exemption

The FIRPTA withholding tax no longer applies to the sale of U.S. property that is either held directly or indirectly through a partnership, or to distributions received from a real estate investment trust (“REIT”), by a qualified foreign pension fund or a foreign entity that is owned by a foreign pension fund.

Qualified Investment Entities

Qualified investment entities include REITs and certain regulated investment companies (“RICs”) that operate as U.S. real property holding corporations. Specific FIRPTA rules that apply to these entities have been modified as follows:

• The classification of RICs as qualified investment entities is now permanently extended and retroactive to January 1, 2015.
• Foreign investors can own up to 10% of the stock issued by publicly traded REITs before becoming subject to FIRPTA.
• Distributions to foreign investors who own up to 10% of the stock issued by publicly traded REITs will not be subject to FIRPTA and will instead be subject to withholding as dividends.
• Any disposition of an interest in a REIT or RIC by a foreign investor will be subject to a 15% withholding rate if at any time during the applicable testing period the REIT or RIC was a U.S. real property holding corporation.

Qualified Shareholders

FIRPTA will not apply to the sale of REIT stock (including stock held indirectly through a partnership) by, or distributions from a REIT from the sale of U.S. real property to, a “qualified shareholder” of the REIT.  This applies even if the REIT is not domestically controlled or publicly traded.

Domestic Control

A publicly traded REIT can assume that shareholders owning less than 5% of the REIT’s stock are U.S. persons unless the REIT has knowledge to the contrary. If a publicly traded REIT or RIC holds the REIT stock, the REIT or RIC will be treated as a U.S. person if it is domestically controlled. Otherwise, it will be treated as a non-U.S. person.

The attorneys at Jurado & Farshchian, P.L. combine their knowledge and experience in the South Florida real estate market with a commitment to personalized, detail-oriented legal services. Contact one of our experienced Florida real estate attorneys at (305) 921-0440, or email us at info@jflawfirm.com.

 

 

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