How Does FIRPTA Withholding Work for Foreign Sellers of U.S. Real Estate?

Are you buying real estate from a foreign seller in the United States? If so, you may be subject to tax withholding under the Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA requires buyers to withhold a portion of the sale proceeds when a foreign person sells U.S. real property. This guide explains how FIRPTA works, who it applies to, what forms are required, and how to determine whether an exception or reduced withholding applies—so you can avoid penalties and stay compliant with IRS regulations.

What Is FIRPTA?

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) allows the United States to tax foreign persons on the sale or transfer of U.S. real estate. To enforce this, buyers must withhold up to 15% of the sales price and send it to the IRS.

This tax applies to any disposition—including sales, exchanges, gifts, redemptions, and other transfers—of a U.S. real property interest (USRPI) by a foreign person.

Who Must Withhold and Why?

In most cases, the buyer (transferee) is the withholding agent responsible for:

• Determining if the seller is a foreign person

• Calculating the correct withholding amount

• Submitting the tax to the IRS

If the buyer fails to withhold when required, they are personally liable for the full amount, plus interest and penalties.

What Is a U.S. Real Property Interest (USRPI)?

A USRPI includes:

• Land, buildings, or natural deposits in the U.S. or U.S. Virgin Islands

• Related property like farming machinery

• Shares in a U.S. Real Property Holding Corporation (USRPHC)

A corporation is a USRPHC if over 50% of its assets’ fair market value consists of U.S. real property interests.

Not a USRPI:

An interest in a domestically controlled REIT or RIC, or in a corporation that no longer owns U.S. real property and was not a REIT/RIC during the lookback period.

Withholding Rates Under FIRPTA

IRS Forms Used for FIRPTA Reporting

1. Form 8288 – Reports and transmits FIRPTA withholding

2. Form 8288-A – Statement of withholding sent to foreign seller

3. Form 8288-B – Used to request reduced withholding

4. Form 1099-S – Reports gross proceeds of sale (by the closing agent)

5. Forms 1042 / 1042-S – Used by REITs and partnerships distributing USRPI to foreign persons

6. Form W-7 – Used by foreign individuals to apply for an ITIN

Deadline: Form 8288 must be filed within 20 days of the transaction, unless delayed by a pending Form 8288-B application.

Withholding Certificates (Form 8288-B)

Foreign sellers may request a withholding certificate to reduce or eliminate withholding if:

1. The withholding exceeds their maximum tax liability

2. They qualify for nonrecognition (e.g., 1031 exchange)

3. They provide security for future tax liability

Application Categories:

1. Nonrecognition or exemption claims

2. Maximum tax liability calculation

3. Special installment sale rules

4. Payment agreements with security

5. Blanket certificates for multiple transactions

6. Other bases approved by IRS

The IRS usually processes applications within 90 days if they are complete and include all parties’ TINs. The seller must notify the buyer that a certificate has been requested.

Exceptions to FIRPTA Withholding

No withholding is required if:

1. The sales price is less than $300,000, and the buyer intends to use the property as a residence.

2. The interest is in a publicly traded U.S. corporation.

3. The seller provides a non-foreign certification.

4. The corporation certifies it is not a USRPHC.

5. The IRS issues a withholding certificate.

6. The sale qualifies for nonrecognition treatment.

7. The amount realized is $0.

8. The buyer is a government entity.

9. The sale involves only the lapse or grant of an option.

10. The seller disposes of a publicly traded partnership or REIT interest (under specific conditions).

FIRPTA and Business Entities

Corporations

• Foreign Corporations: Must withhold 21% of the gain from U.S. property distributions unless they elect to be treated as domestic under IRC 897(i).

• Domestic Corporations: Must withhold 15% of the FMV of property distributed to foreign shareholders if it qualifies as a USRPI.

They may satisfy both FIRPTA and NRA withholding by:

• Withholding on the full distribution using Forms 1042/1042-S, or

• Withholding on the dividend portion under NRA rules, and 15% on the remainder under FIRPTA.

Partnerships

• Publicly Traded Partnerships: Must withhold on distributions unless they elect to withhold based on effectively connected income.

• Private Partnerships: Not subject to FIRPTA if gain is already withheld under effectively connected income rules.

Trusts and Estates

• Must establish a USRPI account and withhold 21% on distributions to foreign beneficiaries.

• Trusts with over 100 beneficiaries may withhold proportionally.

• Publicly traded trusts and REITs must also withhold on distributions of U.S. real property.

Definitions and Key Terms Under FIRPTA

TIN Requirements

All parties must provide a valid Taxpayer Identification Number (TIN). A foreign seller must submit Form W-7 with the FIRPTA documents if they do not have a TIN.

Failure to include a TIN on Form 8288-A will prevent the IRS from issuing a stamped copy (needed to claim tax credit).

Mailing Address for FIRPTA Documents

Internal Revenue Service Center

P.O. Box 409101

Ogden, UT 84409

Final Thoughts

FIRPTA adds complexity to any transaction involving a foreign seller of U.S. property. Understanding these rules is critical to avoid tax liability, penalties, or delays, whether you’re a buyer, real estate agent, title company, or foreign investor.

Work with a qualified real estate attorney or tax advisor to ensure compliance, especially when exemptions or withholding certificates apply.