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PATH Act Impacts FIRPTA Rules

Berdon Tax Team 02.18.2016 | eVisor

The enactment of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) on December 18, 2015 made significant changes to Foreign Investment in Real Property Tax Act (FIRPTA) rules for foreign investment in US real estate.

FIRPTA rules generally require foreign persons to take into account, for US income tax purposes, gain or loss from the disposition of US real property interests (USRPI). A USRPI includes an interest in US real property, as well as certain interests in a US real property holding company (USRPHC).  A USRPHC is a US corporation for which 50% or more of the assets (by value) consist of USRPIs.

Here are the significant changes:

Withholding Rate: Prior to the PATH Act, the withholding rate under FIRPTA was 10% of the gross proceeds. The Act increases the rate to 15% for dispositions after February 16, 2016. However, the 10% rate is retained for sales of residences intended for personal use by the purchaser if the purchase price does not exceed $1 million. In addition, the current personal residence exemption is retained if the purchase price does not exceed $300,000.

The change in the withholding rate does not affect the underlying tax liability. The 15% withholding is on the gross proceeds, but the underlying tax liability is on the net gain, if any. Nonresident aliens and foreign corporations generally pay tax under FIRPTA at graduated tax rates that, depending upon the amount and type of net gain, can be higher or lower than 15%. Foreign corporations can also be subject to a branch profits tax on the net gain under FIRPTA.

Foreign Pension Funds: The PATH Act exempts from taxation under FIRPTA any USRPI held directly or indirectly through one or more partnerships by a qualified foreign pension fund or a foreign entity that is wholly-owned by a qualified foreign pension fund.

A qualified foreign pension fund is an organization or arrangement (i) that is created or organized outside the US; (ii) that is established to provide retirement or pension benefits to current (or former) employees of one or more employers; (iii) that does not have a single participant with a right to more than 5% of the assets or income of the fund; (iv) which is subject to governmental regulation in the country in which the fund was formed or operates; (v) which provides annual information reporting about participants to the relevant tax authorities in the country in which the fund was formed or operates, and (vi) the country in which the fund was formed or operates provides income tax benefits to the fund or the participants.

A country is considered to provide tax benefits if the contributions to the fund are deductible or excluded from gross income or taxed at a reduced rate or the net investment income of the fund is deferred or the income is taxed at a reduced rate.

The exemption for foreign pension funds applies to dispositions and distributions after December 18, 2015 (the date of enactment). For transactions after that date, no FIRPTA withholding will be required.

Note: For an analysis of the PATH Act's impact on FIRPTA rules as they apply to foreign investment through a REIT, click here.

Questions? Contact your Berdon advisor

Berdon LLP, New York Real Estate Accountants

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