Foreign Investment in Real Property Tax Act (FIRPTA)
If You Are A Foreign National Buying Or Selling real estate in Summit County, Colorado, you need to now about the FIRPTA withholding tax. This applies to homes, condos and properties in Breckenridge, Keystone, Frisco, Silverthorne, Dillon and Copper Mountain.
New modifications to the Foreign Investment in Real Property Tax Act (FIRPTA) have resulted in an increase of the withholding tax rate on the sales of a United States real property interest from 10% to 15%.
There is a tiered rate for the withholding tax based on if the property is utilized as a residence or not:
- Sales Price $300,000 or less
If the Purchaser will be utilizing the property as his or her residence, then there is NO withholding tax under FIRPTA.
If the Purchaser is not utilizing the property as his or her home, then the withholding tax rate shall be 15%.
- Sales Price over $300,000 up to $1,000,000:
If the Purchaser is using the said property as his or her residence, then the withholding tax rate shall be 10%.
If the Buyer is not using the property as his or her home, the withholding tax rate shall be 15%.
- Sales Price over $1,000,000:
The withholding tax rate is 15%, whether the Purchaser occupies the property as his or her home or not.
Exemptions typically used in residential real estate transactions:
- The transferor is not a foreign person or entity- If the Transferor (Seller) provides a certification to the Transferee (Buyer) that the Transferor is not a foreign person, no withholding tax is required. The certification should (1) state that the Transferor is not a foreign person; (2) set forth the Transferor's name, identifying number (usually the Social Security Number or U.S. Employer Identification Number) and home address (in the case of an individual) or office address (in the event of an entity); and (3) be signed under penalties of perjury. (This is the standard exemption that most Sellers sign as a part of their closing package).
- Use of property as a residence - Depending on the purchase price, no withholding tax, or the reduced rate of 10% withholding tax will be required if (1) the Transferee is an individual and (2) the property will be used as a residence. To qualify as a residence, the Transferee must have definite plans to reside at the property for at least 50 percent of the number of days that the property is used by any person during each of the first two 12 month periods following the date of transfer.
The number of days that the property will be vacant is not taken into account in determining the number of days such property is used by any person. A Transferee will be considered to reside at the property on any day on which a member of the Transferee's family lives at the property.
NOTE - If the Transferee is not an individual, the residence exemption will not apply even if the property is acquired for or on behalf of an individual who will use the property as a residence.
The new withholding rates will be effective for all closings on or after February 16, 2016.
A difference in the way in which the property will be titled will change the withholding tax. For example, if the Buyer is an individual and then chooses to take title in the name of an entity, the Seller may now be obligated to satisfy the withholding tax at the rate of 15%, which was probably not considered at the time of negotiation and execution of the contract to buy and sell real estate.
There are consequences of such a change on the Seller's foreseen net proceeds. If the change from an individual buyer to an entity is accepted, the title company should be informed as soon as possible so that the accurate settlement statements are conveyed out to the Seller. A switch at the last minute, while not impossible, may result in a delayed timeframe due to the re-execution of the settlement statements.
A significant change to the standard form of contract for 2016 is that the contract is not assignable by the Buyer unless stipulated in the Additional Provisions. Beforehand, the contract granted the Purchaser to assign the contract without the Seller's prior written permission if the box was checked. With this revision, the Seller will have more authority over an assignment, (unless consented to in Additional Provisions), especially when the change may result in withholding tax of 15%.
The Transferee may decline to receive the certification signed by the Transferor, or decline to sign the certification concerning the management of the property as a residence. If this occurs, the withholding tax of 15% must be decreased from the value realized by the Transferor.