FIRPTA (the Foreign Investment in Real Property Tax Act) requires a buyer to withhold part of the sale price when buying U.S. real estate from a foreign person, and send it to the IRS. The general rate is 15% of the amount realized. The withholding is a prepayment toward the seller's U.S. tax, not the final tax.
Why FIRPTA Exists
Foreign sellers don't always file U.S. returns after they sell. FIRPTA makes sure the U.S. collects tax on gains from U.S. real estate by requiring withholding at the closing table.
Who Is Responsible
The buyer is the withholding agent. If the buyer fails to withhold when required, the buyer can be liable for the tax. That's why title companies, closing agents, and real estate agents ask about the seller's status early.
How Much Is Withheld
| Situation | General withholding |
|---|---|
| Most sales by a foreign person | 15% of the amount realized |
| Buyer will live in the home, and the price is $1 million or less | 10% |
| Buyer will live in the home, and the price is $300,000 or less | No withholding |
The residence exceptions have specific requirements for the buyer's use of the property, so confirm them with your closing agent and tax advisor.
Ways to Reduce or Avoid FIRPTA Withholding
- The seller isn't foreign. A U.S. seller signs a certification of non-foreign status, and no withholding applies.
- A residence exception applies (see the table above).
- A withholding certificate. The seller can apply to the IRS (Form 8288-B) to reduce withholding to the tax actually expected, which helps when the gain is small or there's a loss.
- Planning before purchase. How a foreign investor holds the property affects FIRPTA and other taxes. See our FIRPTA tax planning service.
What Happens After Closing
The buyer reports and pays the withholding to the IRS (Forms 8288 and 8288-A), generally within 20 days of the transfer. The seller then files a U.S. return for the year of sale, such as Form 1040-NR, reporting the actual gain. If more was withheld than the tax owed, the difference is refunded.
For the paperwork itself, including withholding certificates and ITIN applications, our subsidiary FIRPTA Solutions handles FIRPTA transactions full time.
Frequently Asked Questions
Is FIRPTA withholding the tax I owe?
No. It's a prepayment. Your actual tax is calculated on your U.S. return, and any excess withholding is refunded.
Does FIRPTA apply if I'm a U.S. green card holder?
Generally no. FIRPTA applies to foreign persons. Green card holders are generally treated as U.S. residents for tax purposes and can certify non-foreign status.
Can a tax treaty eliminate FIRPTA?
Generally no. U.S. treaties typically preserve the U.S. right to tax gains on U.S. real estate.
Talk to St. Clair Advisory Group
Every situation is different. Our team in Cape Coral can review yours and tell you what applies.
This article is general information, not tax or legal advice for your situation. Tax rules change, and dates can shift for weekends, holidays, and IRS disaster relief. Confirm current rules with a tax professional before acting.