Commercial Real Estate Blog by Madison
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FIRPTA Withholding Rates have been Increased to 15%

By Lee David Medinets, Esq., Chief Counsel, MCRES and Senior Counsel, Madison Exchange, LLC a/k/a Madison 1031 and their affiliates

Until a few days ago, The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), IRC Sec. 1445, provided generally that the transferee (i.e., the purchaser) of U.S. real property or a qualified substitute must withhold from closing proceeds 10% of the gross purchase price paid for the U.S. real property. That amount must then be forwarded to the IRS as a withholding tax on the transferor (i.e., the seller) whenever the transferor is a foreign person (as that term is defined in the act). Real estate attorneys, escrow agents and qualified intermediaries routinely act as qualified substitutes in these transactions. If the transferor or a qualified substitute fails to forward FIRPTA withholding in a timely fashion, that party can be liable for the funds it should have withheld plus penalties and interest. The liability of qualified substitutes however, is generally limited to the compensation it received on the transaction.

The Consolidated Appropriations Act, 2016, Public Law 114-113 is a massive omnibus financial and tax bill (6.75 Meg. in Word format) that recently became law. Division Q of that law is titled the “Protecting Americans from Tax Hikes Act of 2015” (the “PATH Act”). Section 324 increases the FIRPTA withholding rate from 10 percent of the gross sales price to 15 percent of the gross sales price. Continue reading

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