Foreign Capital and U.S. Real Estate
There have been continued international capital inflows into U.S. real estate assets and the trend is expected to grow. Political uncertainty and global economic factors continue to drive foreign money into the United States, long considered a safe haven.
The U.S. property market is the most stable, transparent in the world, making it an easy investment choice. According to research firm Real Capital Analytics, foreign purchases of U.S. real estate assets rose to $62 billion over the 12-month period ending in October 2015.
It should be expected that these foreign investors will eventually reposition their assets and liquidate certain holdings based upon expected returns and market changes.
Understand the Foreign Withholding Rules
Buyers of real estate from foreign sellers, escrow agents and closing agents who close on such transactions need to be aware of the federal withholding requirements set in the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
Under FIRPTA, the buyer of U.S. real estate from a foreign person or entity must withhold tax equal to 10% of the “amount realized” from the sale. The amount realized includes the total amount received for the property including cash, the existing balance of mortgages encumbering the property, and any non-cash personal property.
Withholding under FIRPTA
Withholding is required when the seller is a foreign person (including non-resident alien individuals, partnerships, trusts and estates, and certain corporations domiciled outside of the United States). At or before the closing, if the seller signs a certification of non-foreign status stating under penalty of perjury that he is not a foreign person, the buyer can rely on that unless he has actual knowledge that it is not accurate. If the seller is able to sign the certification, no withholding is required, but the buyer must retain the certification for five years after the transfer.
If the seller is a foreign entity or person, the buyer must withhold the 10% and remit the tax to the IRS within 20 days of the date of closing. If the buyer fails to do so, the buyer is liable to the IRS for the tax that should have been withheld, plus penalties and interest.
If the ultimate tax liability is expected to be zero or less than the required 10% withholding amount, the foreign seller can apply for a withholding certificate to request a reduction in the withholding amount. This is done by filing IRS Form 8288-B.
There are exceptions to the withholding requirements, including property used as a home and 1031 exchanges, but both are not without specific qualifications.
When purchasing real estate from a foreign seller, it is important for buyers to consult with their advisors to ensure compliance under FIRPTA.