New Regulations Change Withholding Requirements for Dispositions of U.S. Real Property

The IRS has issued regulations pursuant to the Protecting Americans from Tax Hikes Act (“PATH”) that make changes to the income tax withholding requirements for nonresident aliens when U.S. situs property is liquidated. While foreign individuals are generally exempt from capital gains for asset sales which are not connected with a U.S. trade or business, the IRS treats U.S. real property as being connected to the U.S. and subjects such sales to withholding requirements. The regulations imposed by the IRS increase the withholding requirements thereby resulting in less funds being immediately available for sellers of U.S. real propertThe requirement to withhold funds is generally imposed on transferees and is often part of the escrow process. Prior to the imposition of the new regulations, the transferee was required to withhold 10%. For sales that take place after February 16, 2016, the withholding rate increases to 15%. (PATH Act §324(a)) While the 10% continues to apply for the sale of homes used as a residence, this exception only applies to residences that have a realized sale value of between $300,000 and $1 million. PATH Act §324(a)).