What Is The FIRPTA Tax And How Does It Affect Foreign Real Estate Sellers?

Imagine this: you’re a foreign national who has invested in U.S. real estate. After years of owning property, you’ve decided it’s time to sell. You’ve lined up a buyer, signed the paperwork, and expect to walk away with your profits—only to find out that a significant chunk of your earnings has been withheld due to something called the FIRPTA tax.

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This scenario is more common than you might think. The Foreign Investment in Real Property Tax Act (FIRPTA) often surprises foreign sellers who are unaware of their tax obligations when selling U.S. property. Understanding how FIRPTA works can save you from unnecessary financial and legal complications.

What Is the FIRPTA Tax?

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted by the U.S. Congress in 1980. It requires that foreign individuals and entities pay taxes on the gains they earn from selling U.S. real estate.

The core requirement is this: when a foreign person sells U.S. real estate property, the buyer must withhold a percentage of the gross sales price and send it to the IRS. This ensures that the foreign seller pays the required capital gains taxes.

This tax applies regardless of whether the property was residential, commercial, or undeveloped land.

Who Does FIRPTA Apply To?

FIRPTA tax applies to the following foreign sellers:

• Non-resident aliens

• Foreign corporations

• Foreign partnerships

• Foreign trusts and estates
  

Even if a property has been held for many years or was inherited, the law still applies. U.S. citizens and resident aliens are generally not subject to FIRPTA.

How Much Is Withheld? Understanding the FIRPTA Withholding Tax Rate

The amount withheld depends on several factors, but typically:

• 15% of the gross sales price is withheld for most transactions.

• If the property is sold for under $300,000 and the buyer intends to use it as a residence, the withholding may be reduced to 0% or 10%, depending on specific conditions.
  

This FIRPTA withholding tax rate is not the actual tax owed, but rather a prepayment of possible tax liability. The actual amount due is determined when the foreign seller files a U.S. tax return for the year of the sale.

FIRPTA Process: How It Works

1. Buyer’s Responsibility: The buyer or their settlement agent must withhold the required amount at closing.

2. IRS Submission: The withheld funds are sent to the IRS using Form 8288 and 8288-A.

3. Seller’s Tax Return: The foreign seller must file a U.S. income tax return (Form 1040NR or Form 1120-F) to report the gain or loss and claim any refund due.
   

Failure to withhold properly can result in the buyer being liable for the unpaid tax, including penalties and interest.

Common Challenges Foreign Sellers Face

Many foreign sellers aren’t aware of FIRPTA until it’s too late. This lack of awareness often leads to:

• Unanticipated loss of sale proceeds

• Delays in closing

• Difficulty claiming refunds

• Legal or tax penalties for noncompliance
  

Hiring a tax attorney or accountant familiar with FIRPTA tax can prevent these issues and streamline the process.

How to Reduce or Avoid Withholding

There are some legal ways to reduce or eliminate the required withholding:

• IRS Withholding Certificate (Form 8288-B): Foreign sellers can apply for a reduced withholding if they expect little to no tax liability from the sale. This form must be submitted early in the transaction process.

• Exemptions Based on Sale Price and Buyer Intentions: If the buyer plans to live in the property and the sale is under a certain amount, the withholding can be reduced.
  

These steps are technical and time-sensitive. Professional advice is crucial.

FIRPTA vs. Actual Tax Liability

It’s important to remember: the FIRPTA withholding tax rate is not the final tax bill. Once you file a U.S. tax return, your actual tax liability is calculated based on:

• Original purchase price

• Sale price

• Expenses related to the sale

• Capital gains tax rates
  

If too much was withheld, you can request a refund. If too little was withheld (rare), you’ll owe the difference.

Timeline for Refunds

Foreign sellers often ask how long it takes to receive a refund if too much was withheld.

• Without a withholding certificate: Refunds can take 6 to 12 months after filing a U.S. tax return.

• With a withholding certificate: The process is often faster, but timing depends on IRS backlog and filing accuracy.
  

Final Thoughts

If you’re a foreign investor selling U.S. real estate, don’t be caught off guard by the FIRPTA tax. Planning ahead and working with professionals can save you time, stress, and money.

The U.S. real estate market continues to attract international buyers and sellers, but understanding laws like FIRPTA is critical. Know your obligations, explore your options to reduce the FIRPTA withholding tax rate, and ensure compliance so your investment returns remain strong.

Whether you're selling tomorrow or just considering it, make sure you're informed about FIRPTA today.