On December 18th, President Obama signed H.R. 2029, using the tax (the “Protecting Americans from Tax Hikes Act of 2015”) and spending bills (Consolidated Appropriations Act, 2016) to fund the government for its 2016 fiscal year.
In December, the Act increases the rate of withholding from dispositions of U.S. real property interests under §1445 from 10% to 15%.
If the acquired property is used as residence by the purchaser for at least 50% of the number of days during each of the first two 12-month periods following the date of purchase, then there is no withholding if the sale price is up to $300K. If the sale price for the residence meeting the foregoing use test is over $300k but under $1M, there is withholding, but at 10%.
Properties without the foregoing intent to occupy or properties with the intent to occupy with a sale price over $1M, will attract the 15% withholding rate.
The increase in the withholding tax rate should cause those taxpayers with losses or nominal gains or those renters with passive activity loss carryovers, to apply for a withholding certificate using IRS Form 8288-B to reduce the withholding to an amount equivalent to their effective tax. This application (8288-B) must be received by the closing date and the IRS should act within 90 days of receipt. Otherwise refunds are only available upon filing the non-resident tax return (ie., 1040NR/1120F) reporting the disposition and currently takes about 6 months for processing.
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