Overview
The Foreign Investment in Real Property Tax Act (FIRPTA), enacted in 1980, requires the buyer to withhold a portion of the sale price when a foreign person sells U.S. real estate, and remit it to the IRS on the seller's behalf. The standard rate is 15% of the gross sale price, dropping to 10% for sales between $300,001 and $1,000,000 where the buyer will use the property as a primary residence, and to 0% for qualifying sales at $300,000 or below. The buyer must file Form 8288 and remit the withholding within 20 days of closing. This guide covers what both foreign buyers and sellers need to know.
What Is FIRPTA?
Before FIRPTA, foreign investors could sell U.S. real property without the same tax obligations U.S. citizens and residents faced, raising concerns about tax avoidance. FIRPTA closed that gap by requiring the buyer to withhold tax at closing and remit it directly to the IRS, ensuring foreign sellers pay their share before the funds leave the country. The withholding isn't necessarily the seller's final tax bill — it's collected upfront, and the seller can file a U.S. tax return afterward to recover any amount that exceeds their actual liability.
Who Does FIRPTA Apply To?
FIRPTA applies to a foreign person's sale of a "U.S. real property interest," which covers:
- Residential properties — single-family homes, townhouses, condos, and apartments
- Commercial properties — office buildings, retail spaces, industrial properties, and vacant land
- Rental properties that generate income, subject to certain exemptions
It applies to both individual foreign sellers and foreign entities.
The Withholding Rate
The rate depends on the sale price and how the buyer will use the property:
- 15% of the gross sale price is the standard rate for most transactions.
- 10% applies to sales between $300,001 and $1,000,000 where the buyer will use the property as a primary residence.
- 0% applies to qualifying sales at $300,000 or below where the buyer intends to use the property as a primary residence.
A seller who expects their actual tax liability to be lower than the standard withholding can apply for a withholding certificate on IRS Form 8288-B to reduce the amount withheld before closing, rather than waiting for a refund afterward.
Common Exemptions
Beyond the reduced-rate thresholds above, other exemptions include:
- Non-foreign status: If the seller is actually a U.S. person — citizen, green card holder, or resident alien — they can provide a signed certification of non-foreign status to the buyer, eliminating withholding entirely.
- Passive rental income: Certain passive income exemptions apply if the owner isn't an "active participant" in managing the property.
See the IRS's full list of FIRPTA withholding exceptions for the complete rules.
What Foreign Buyers Should Know
- Understand your future obligations: If you eventually resell, you'll be the seller subject to FIRPTA withholding then.
- Work with a specialist: A CPA or real estate attorney experienced in FIRPTA can guide you through the process and any obligations tied to your purchase.
What Foreign Sellers Should Know
- Consult professionals early: A CPA or FIRPTA-experienced attorney can help determine your actual obligations and required documentation before closing.
- The buyer withholds and remits: Your buyer (or their settlement agent) is legally responsible for withholding and paying the tax to the IRS, not you directly.
- Consider a withholding certificate: If your actual tax liability will be lower than the standard withholding, applying for Form 8288-B before closing can reduce what's withheld, rather than waiting months for a refund.
The Withholding and Filing Process
- Determine the rate: The buyer or their settlement agent calculates the applicable withholding rate based on price and intended use.
- File Form 8288: The buyer, as withholding agent, files Form 8288 with the IRS — the U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests.
- Attach Form 8288-A: A separate Form 8288-A is prepared for each foreign seller, documenting the amount withheld.
- Remit within 20 days: Form 8288, with 8288-A attached, and the withheld funds must be filed and remitted to the IRS within 20 days of closing — not 30, a common misconception.
- Seller claims the credit: The seller uses the stamped copy of Form 8288-A to claim the withheld amount as a credit on their U.S. tax return (typically Form 1040-NR), and can request a refund if the withholding exceeded their actual liability.
If a Form 8288-B withholding certificate application is pending at closing, the buyer can delay filing Form 8288 and remitting funds until 20 days after the IRS approves or denies the certificate, rather than remitting the full standard amount upfront.
Role of Real Estate Agents in FIRPTA Transactions
Agents aren't responsible for withholding or remitting FIRPTA tax, but they play a real supporting role — educating clients on how FIRPTA affects their transaction, referring them to qualified CPAs or attorneys, helping coordinate timely paperwork between all parties, and verifying that required documentation, like Form 8288-A, is being handled correctly. Agents aren't tax professionals and shouldn't give direct tax advice, but a knowledgeable one can help a FIRPTA transaction go far more smoothly.
