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3 FAQs on Taxes
Even though you should never give clients tax advice, it's important to understand how your international clients will be impacted by tax laws—and to ensure you are complying with tax-related obligations that extend to real estate professionals.
Here are three frequently-asked questions concerning the U.S. tax system.
Q: Do foreign owners of U.S. property face the same tax consequences as U.S. citizens?
A: Capital gains taxes generally apply to anyone who sells U.S. property. To ensure non-U.S. citizens comply with U.S. tax laws, the Foreign Investment in Real Property Tax Act (FIRPTA) requires buyers to withhold part of the sales proceeds and submit them to the IRS in certain circumstances.
While FIRPTA has been in place since 1980, significant changes were added in 2016 with the passage of the Protecting Americans from Tax Hikes Act (PATH Act). The new provisions increased the withholding rate from 10 to 15 percent, except for sales of residences for personal use under $1 million.
Agents for the buyer and seller both have important obligations to comply with FIRPTA rules. For details on your requirements under the current provisions, view NAR's webinar at bit.ly/NAR-FIRPTA.
Q: How did the PATH Act impact U.S. commercial real estate?
A: Starting in 2016, commercial properties (at any price) became subject to the 15 percent withholding rate. While foreign investors were not happy to face higher withholding rates, two other modifications to the FIRPTA rules in the PATH Act provided substantial benefits:
The maximum amount of stock ownership by a foreign investor in a U.S. publicly-traded real estate investment trust (REIT) was doubled, from 5 to 10 percent.
The new law also permits certain foreign pension funds to invest in REITs without being subject to FIRPTA,
Q: Do 1031 tax-deferred exchanges only apply to U.S. citizens?
A: No. Foreign individuals (non-U.S. citizens and nonresident aliens) and foreign companies who own U.S. property for income or investment purposes can also take advantage of 1031 tax-deferred exchanges.
To quality, both the exchanged and relinquished property must be located in the U.S., which includes all 50 states, the District of Columbia, and the U.S. Virgin Islands.
It's essential to engage tax specialists, including a qualified intermediary, for assistance in properly setting up these transactions, which can be extremely complex.
FIRPTA Withholding Rules for Residential Sales
Buyer's Use of the Property
Withholding Rate
$300,000 or less
$300,000 to $1M
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