There are new rules for taxes on home sales you will want to understand. We know taxes are not the most sexy subject, but they’re important for one to understand when it comes to the disposition of real property assets.
First, what is FIRPTA? The IRS defines it as the, “Foreign Investment in Real Property Tax Act of 1980 regarding the disposition of a U.S. real property. Interest by a foreign person (the transferor) is subject to the (FIRPTA) income tax withholding.”
What the Change to FIRPTA Withholding Means for You
Under current federal law, if a foreign person sells US real property, the buyer is obligated to withhold 10% of the gross sales price and remit this to the IRS. Pursuant to the Protecting Americans from Tax Hikes Act of 2015, however, which became law on December 18, 2015 (the “PATH Act”), the required 10% withholding will increase to 15% for all closings occurring on or after February 16, 2016.There is an exception to the increase for sales of a personal residence wherein the sales price is between $300,001 and $1,000,000. Under this circumstance, the 10% withholding rate continues to apply. In summary:
- If the sales price is $300,000 or less AND the buyer will use as a personal residence – No change, exempt from withholding.
- For all other real estate sales the buyer must withhold 15% of the sales price of the real estate (10% if a personal residence with a sale price between $300,001 and $1,000,000) and send it to the IRS within 20 days after the date of transfer.
Do you as a buyer really have to hang onto the 15% of the seller’s proceeds? The answer is if you don’t, you could be liable for the seller’s tax obligation. But not to worry, if you use an escrow company to handle your transaction they’ll take care of it for you, and protect you by having the seller sign a form for the IRS.
Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA. with more than 20 years experience in helping sellers and buyers in their community. They may be reached at (650) 508.1441 or emailed at firstname.lastname@example.org.
You can find them on Facebook at https://www.facebook.com/Morganhomes and also find them on Twitter @ https://twitter.com/morganhomes
The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.