Here are the new FIRPTA rules of the PATH act simply defined:
It is not a tax, but a mandatory tax deposit of 10% to 35% of the sales price, depending on type of sale. So, if the sales price is $130,000, and you are subject to the 10% tax deposit, the deposit would be $13,000. Capital gain or loss on the property has nothing to do with this equation. The buyer of the property is responsible for withholding and submitting the tax deposit using form 8288. When a non-U.S. person files their annual non resident tax return, they would receive the refund of the tax deposit less any tax actually due.
The withholding rules:
- If the sale price is $300,000 or less, and the property will be used by the buyer or member of their family as a primary residence (as provided for in the current regulations), no sums need be withheld or remitted. Per the IRS regulations, the buyer will not be liable for any tax the foreign person may owe.
- If the sale price exceeds $300,000 but does not exceed $1,000,000,and the property will be used by the buyer or member of their family as a primary residence, then the withholding rate stays at 10% on the sale price.
- If the sale price exceeds $300,000 but does not exceed $1,000,000, and the property will not be used by the buyer or member of their family as a primary residence (i.e. investment property), then the withholding rate is 15% on the sale price.
- If the sale price exceeds $1,000,000, then the withholding rate is 15% on the sale price, regardless of use by the buyer.
If a single-member LLC is owned by a foreign (Non-U.S. person), then the withholding rules apply as stated above. The IRS considers a single member LLC as disregarded entity, so the transaction will be treated under the name and tax identification of the owner for tax purposes.
If the seller is a foreign corporation (non-US), then the withholding rate is 35%.
A US partnership or Corporation is not subject to the FIRPTA withholding even if they have foreign partners/shareholders. The partnership or Corporation itself would be responsible for submitting the tax deposit on the sale.