Non-U.S. Taxpayers who sell U.S. real estate holdings may be subject to withholding of 15% of the gross sales proceeds beginning February 16, 2016 under a provision of the “Protecting Americans from Tax Hikes Act of 2015.” Previously 10% withholding was required for transactions over $300,000. The new law requires 15% withholding on most transactions, with certain exceptions.
Exceptions
Buyer will use property as principal residence:
If the buyer is purchasing the property as a principal residence, the rules are different, based on the sale price:
|
Less than $300,000: |
No withholding |
|
$300,001 – $1,000,000: |
10% withholding |
Seller provides documentation:
Two documents can exempt or reduce withholding:
- IRS withholding certificate obtained prior to the closing which reduces or eliminates withholding (note that this can require significant lead time)
- Certification, under penalties of perjury, stating that seller is not a foreign person (as defined in the IRC), providing seller’s U.S. tax ID number and home address
Seller realizes zero:
Seller declares non-recognition of gain or loss by closing on a §1031 like-kind exchange simultaneously and receiving no cash or mortgage boot.
Property is acquired by a government entity:
Property acquired by federal, state and local governments or their agencies is not subject to withholding.
Preparation
Buyer side: Responsibility for withholding the required amount and submitting the required documentation to the IRS lies with the buyer. The buyer’s legal team needs to be prepared to support this.
Seller side: On the seller side, brokers and attorneys should be sure to inform their clients of the potential for increased withholding. Some may not know about the withholding at all, while others may be unprepared for the increase.
MORE READING FROM HOLM & O’HARA LLP
IRC §1031 By the Numbers Brochure
Triple Net (NNN) Leased Properties:
NATIONWIDE INVESTMENT OPPORTUNITIES
Connect