A Guide to FIRPTA

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If you participate in real estate transactions in the United States – especially when foreign sellers are involved – you may come across the acronym FIRPTA. Short for the Foreign Investment in Real Property Tax Act, FIRPTA is a tax law that can significantly impact how real estate sales involving foreign owners are handled.

What is FIRPTA?

FIRPTA is a U.S. tax law enacted in 1980 to ensure that foreign individuals and entities pay tax on the sale of U.S. real estate. Under this law, when a foreign person sells a U.S. real property interest, the buyer is generally required to withhold a portion of the sale proceeds (typically 15%) and remit it to the IRS.

This withholding acts as a prepayment of the foreign seller’s potential U.S. tax liability.

Why Does FIRPTA Exist?

Foreign investors can earn significant gains from selling U.S. property, but the IRS does not have the same access to enforce tax collection abroad. FIRPTA ensures the U.S. government collects taxes at the time of sale, through the buyer, before the foreign seller disappears from the tax net.

Key Players in a FIRPTA Transaction

Foreign Seller: Any nonresident alien, foreign corporation, or other foreign entity selling U.S. real estate.

Buyer: Responsible for withholding and remitting the FIRPTA tax to the IRS.

Settlement Agent or Escrow Officer: Often facilitates the FIRPTA process but is not legally responsible.

IRS: Collects the withholding and processes any refund if overpaid.

How Much is Withheld Under FIRPTA?

The amount withheld depends on the sale price and intended use:

15% of the gross sale price is the general rule.
10% withholding may apply if (1) the property is sold for $300,000 or less, AND (2) the buyer intends to use it as a personal residence.
No withholding may apply if certain exemptions are met and appropriate documentation is filed.

Buyer Responsibilities Under FIRPTA

Yes, you read that right: buyers are responsible for withholding and sending the money to the IRS—even though it is the seller’s tax!

Here is a Buyer’s FIRPTA Checklist:

Determine seller’s residency status.
Withhold 10–15% of the sale price if the seller is foreign.
File IRS Form 8288 and 8288-A, and send the forms along with the withheld funds to the IRS within 20 days of the closing date.
Keep records in case the IRS asks for verification.

Failure to comply can result in the buyer being held liable for the full amount of tax, plus interest and penalties. Your title insurance and escrow agency can help facilitate compliance.

Can the Seller Avoid Withholding?

Yes—but not the tax itself. In some cases, the foreign seller can apply for a Withholding Certificate from the IRS before closing, using Form 8288-B, to reduce or eliminate the withholding if: (1) the actual tax liability is less than the amount that would be withheld, and (2) the transaction qualifies for an exemption. The application must be submitted before or at the time of closing, and approval from the IRS can take 90 days or more.

Common Exceptions to FIRPTA

Let’s say a foreign investor sells a U.S. condo for $500,000. The buyer is required to:

Withhold 15%, or $75,000, at closing.
File IRS Form 8288 and 8288-A.
Send both forms and the $75,000 to the IRS within 20 days of the transaction.

Later, the seller files a U.S. tax return to report the actual gain (or loss) and may receive a refund if the withheld amount exceeds their tax liability.

Parting Words

FIRPTA is a crucial part of any U.S. real estate transaction involving foreign sellers. Although it can seem complex, the key takeaway is this: if you are buying U.S. property from a foreign seller, you are responsible for ensuring FIRPTA compliance—or you may be on the hook for the tax.

Working with an experienced real estate attorney, CPA, or tax advisor can help ensure you stay compliant and avoid costly mistakes.