FIRPTA Regulations and Withholding Requirements

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) is a federal law ensuring foreign owners of U.S. real estate pay taxes on profits from property sales. It addresses the difficulty of collecting taxes from sellers who may have few financial ties to the United States after a sale. FIRPTA’s collection mechanism places the responsibility on the property’s buyer.

The buyer must withhold a portion of the total sale price at closing. This withheld amount is not the final tax but is a prepayment to the Internal Revenue Service (IRS) on the foreign seller’s behalf, securing the potential tax liability before proceeds leave the country.

Determining FIRPTA Applicability

FIRPTA applies based on the seller’s status as a “Foreign Person” and the asset’s classification as a “U.S. Real Property Interest” (USRPI). For tax purposes, a Foreign Person is broadly defined to include nonresident alien individuals, who are not U.S. citizens and do not meet specific residency tests. The category also extends to foreign corporations that have not elected to be treated as domestic corporations, as well as foreign partnerships, trusts, and estates. This determination is based on the seller’s U.S. tax status, not their citizenship or residence.

A transaction is subject to FIRPTA if it involves the sale of a USRPI. This term covers more than direct ownership of land and buildings, including fee ownership, co-ownership, leaseholds, and options to acquire such properties. It also includes mineral rights and other natural resource deposits in the United States.

A USRPI also includes shares in a U.S. corporation if it qualifies as a U.S. real property holding corporation (USRPHC). A corporation is classified as a USRPHC if the fair market value of its U.S. real property interests is 50% or more of the total value of its worldwide real property and business assets. This rule prevents sellers from avoiding FIRPTA by holding U.S. real estate in a corporation and selling the stock instead of the property.

The FIRPTA Withholding Requirement

When a transaction is subject to FIRPTA, the buyer must withhold 15% of the amount realized by the foreign seller. The “amount realized” is the gross sales price, which includes cash, the fair market value of other property transferred, and any liabilities the buyer assumes. This withholding is based on the total sale price, not the seller’s profit, and is required even if the seller has a financial loss.

The buyer is the designated “withholding agent” and is legally liable for the tax if it is not collected and remitted to the IRS. In practice, the withholding and remittance are often handled by a closing agent, such as a title company or real estate attorney. These professionals can manage the flow of funds and ensure the correct amount is set aside from the seller’s proceeds. However, the legal liability does not transfer and remains with the buyer.

Exceptions and Reductions to Withholding

Several exceptions can alter or eliminate the 15% withholding requirement. The most common method is for the seller to provide the buyer with a certification of non-foreign status. This is a sworn affidavit stating, under penalty of perjury, that the seller is not a foreign person for U.S. tax purposes and must include the seller’s name, U.S. Taxpayer Identification Number (TIN), and home address. A buyer who accepts this certification in good faith is relieved of the withholding duty.

An exception also applies if the property will be the buyer’s personal residence, with the rules tiered by sales price. If the amount realized is $300,000 or less, withholding is zero. For sales between $300,001 and $1,000,000, the rate is reduced to 10%. This exception requires that the buyer or a family member has definite plans to reside at the property for at least 50% of the number of days it is used by any person during each of the first two 12-month periods following the sale. Sales over $1,000,000 are subject to the full 15% rate regardless of the buyer’s use.

A foreign seller can also apply to the IRS for a withholding certificate to reduce or eliminate the amount by filing Form 8288-B before closing. The application is based on a claim that the 15% withholding on the gross sales price exceeds the seller’s actual maximum tax liability on the gain. To support this, the seller provides a calculation of the gain, factoring in the property’s original purchase price and capital improvements. If the IRS approves, it will issue a certificate authorizing a lower or zero withholding amount.

Complying with Reporting and Remittance

If withholding is required, the buyer must follow a specific process for reporting and paying the tax. The buyer or their agent uses IRS Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, to report the transaction. This form details information about the buyer, the foreign seller, the property, and the amount withheld.

The buyer also completes Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, for each foreign seller, which serves as their record of the tax withheld. Within 20 days of the closing date, the buyer must send the completed Form 8288, copies of Form 8288-A, and the payment to the IRS.

After processing, the IRS stamps a copy of Form 8288-A and mails it to the foreign seller. This stamped form is the seller’s official proof that the tax was paid on their behalf.

The Foreign Seller’s Tax Filing Obligations

The FIRPTA withholding is an estimated payment, not the final tax. A foreign seller’s ultimate tax liability is determined by the actual capital gain realized on the sale, so they must file a U.S. income tax return for the year of the sale to reconcile the amount. A nonresident alien individual generally files Form 1040-NR, U.S. Nonresident Alien Income Tax Return.

On this return, the seller reports the property sale, calculates the precise capital gain or loss, and determines the actual tax due on that net profit. When filing the tax return, the seller attaches the stamped copy of Form 8288-A received from the IRS. This form allows the seller to claim the amount withheld as a tax payment credited toward their total tax liability for the year.

If the withholding was greater than the actual income tax calculated on the gain, the seller is entitled to a refund for the difference.