Foreigners Subject to a 15% FIRPTA Withholding Tax for Dispositions After February 16, 2016 -Ouch!

Foreign investors are generally not subject to US tax on US source capital gain unless it is effectively connected with a US trade or business, or it is realized by an individual who meets certain physical presence requirements.
Gains from the disposition of a U.S. real property interest (USRPI), however, are treated as income effectively connected with a US trade or business under the Foreign Investment in Real Property Tax Act (FIRPTA) under Code Sec. 897 and Code Sec. 1445. Stock or a beneficial interest in a US real property holding corporation (USRPHC) is a USRPI.

Regulations reflecting changes made by the Protecting Americans from Tax Hikes (PATH ) Act related to the taxation of, and withholding on, foreign persons that dispose of U.S. property will be published February 19, 2016. The final and temporary rules (T.D. 9751) increase the withholding rate under certain subsections of tax code Section 1445 from 10 percent to 15 percent. The new rate applies to dispositions after February 16, 2016.

However, the PATH Act provides for a reduced FIRPTA withholding rate of 10% in the case of a disposition of property which is acquired by the transferee for use by the transferee as a residence, and the amount realized for the property does not exceed $1,000,000, provided the exemption for a residence bought for $300,000 or less does not apply.