What is FIRPTA?
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Table of Contents
How much of the sale price is held back when a foreign person sells US property?
If a non-US person sells real estate located in the United States, 15% of the gross sale price must usually be withheld and sent to the IRS. This rule falls under the Foreign Investment in Real Property Tax Act (FIRPTA) and applies whether or not the seller makes a profit.
It’s not a final tax—it’s a withholding to ensure the IRS can collect any potential tax on the sale. The buyer is the one legally responsible for handling this withholding.
Can foreign sellers avoid FIRPTA withholding in some situations?
Yes, there are a few exceptions where withholding can either be reduced or avoided entirely:
- Low-value residential sales – If the sale price is US$300,000 or less and the buyer intends to live in the home at least half of the time, no withholding is required.
- IRS-approved reduction – The seller can apply for a withholding certificate (Form 8288-B) before closing, which may allow for a lower withholding amount.
- Seller is not considered foreign – If the seller provides a Certification of Nonforeign Status, FIRPTA doesn’t apply.
- Certain corporate or deferred transactions – Like-kind exchanges or sales through qualified US corporations may qualify for special treatment.
These exceptions must be properly documented to avoid issues at closing.
What types of property or investments are affected by FIRPTA?
FIRPTA applies to a wide range of US real estate and related assets held by foreign persons:
- Residential homes and rental units – Whether it’s a second home, vacation rental, or investment property, FIRPTA applies if the seller is foreign.
- Commercial real estate – Sales of retail buildings, office space, warehouses, or any other income-producing US property fall under this rule.
- Empty lots and land – Unimproved land is also included, even without any construction on it.
- Shares in REITs (Real Estate Investment Trusts) – Foreign shareholders selling interests in certain US REITs may be subject to withholding.
- Stock in real estate-heavy corporations – If more than half the value of a US company comes from real estate, then selling shares in that company may be treated like a real estate sale.
- Indirect interests – Partnership or trust investments tied to US property can also fall within FIRPTA’s scope.
If the asset is connected to US real estate, even indirectly, FIRPTA might apply.
What does this mean for a foreign person selling property in the US?
If you’re a nonresident or foreign investor and you’re selling a US property, you probably won’t receive the full sale proceeds at closing. Instead, 15% of the sale price will be withheld unless you qualify for a waiver or reduction.
You may not owe that much in actual tax, but the IRS requires it upfront. After the sale, you’ll need to file a US tax return to report the gain or loss and to possibly claim a refund of any extra tax withheld.
In short, FIRPTA doesn’t prevent the sale—it just holds back part of the funds until your US tax filing is complete.
Who’s responsible for withholding and reporting under FIRPTA?
Although the rule is about foreign sellers, the buyer is legally responsible for making sure the right amount is withheld and sent to the IRS. Others involved in the transaction may also have duties. Here’s a breakdown:
- Foreign sellers – Must provide a US tax ID number (ITIN or TIN) and may need to file a return afterward
- Buyers – Must handle the withholding, complete Forms 8288 and 8288-A, and send them with payment to the IRS
- Real estate professionals – Escrow agents, attorneys, and title companies often help manage the paperwork and ensure compliance
- Qualified substitutes – In some cases, a third party can take over FIRPTA responsibilities to streamline the closing process
Everyone involved must stay on top of the documentation. Mistakes or delays can result in penalties—especially for the buyer.
Need help understanding if FIRPTA affects you? Consult with a tax pro today.
What can sellers do if 15% is more than what they actually owe?
If the seller expects to owe less tax than what would be withheld under FIRPTA, they can request a reduction in advance:
- Submit Form 8288-B to the IRS before the sale closes
- Provide estimated gain/loss calculations and supporting documents
- Wait for the IRS to issue a withholding certificate, which allows a lower amount to be withheld
Alternatively, if too much is already withheld at closing, the seller can recover the difference by filing a US tax return the following year. This is common for foreign individuals selling property at a loss or with minimal gain.
What steps should be taken to report and send FIRPTA withholding to the IRS?
When a foreign person sells US real estate, the buyer is responsible for making sure FIRPTA withholding is properly reported and submitted. This means the buyer—not the seller—must handle the paperwork and payment.
Here’s how the process works:
- Forms 8288 and 8288-A must be filled out by the buyer. These forms report the details of the sale and the amount withheld.
- The buyer must send 15% of the total sale price (not just the gain) to the IRS within 20 days after the transaction closes.
- The IRS processes the forms and returns a stamped copy of Form 8288-A to the seller. This is the seller’s proof that the funds were received.
If the seller believes too much is being withheld, they can request a lower withholding rate by submitting Form 8288-B before the closing date. If approved, the IRS will instruct the buyer to withhold a reduced amount.
Later, the seller files a US tax return to report the actual results of the sale and either pay additional tax or claim a refund.
What happens if FIRPTA rules aren’t followed properly?
FIRPTA compliance is taken seriously. If the required amount isn’t withheld or reported on time, penalties can apply—and responsibility falls mostly on the buyer.
Here are the potential consequences:
- The buyer may have to pay the full 15% tax out of pocket if it wasn’t withheld as required.
- Late payments to the IRS may result in interest charges and penalties.
- In more serious cases, the IRS could place a lien on the property to recover unpaid amounts.
Mistakes that commonly lead to penalties include:
- Not realizing that the seller is a foreign person
- Sending the withholding late or in the wrong amount
- Submitting incomplete or incorrect forms
Because buyers are legally responsible, it’s important they confirm the seller’s status and act quickly after closing.
What role does the closing or escrow agent play in FIRPTA transactions?
The closing agent—sometimes called an escrow officer or settlement agent—is often the first person to flag whether FIRPTA applies. Their job is to keep everything on track and make sure required steps aren’t missed.
Typical responsibilities include:
- Checking if the seller is foreign and confirming whether FIRPTA applies
- Withholding 15% of the sale price and making sure it’s not released to the seller
- Preparing and filing Forms 8288 and 8288-A with the IRS
- Providing the seller with a stamped copy of Form 8288-A once it’s returned by the IRS
- Assisting the seller with Form 8288-B if they’re applying for a reduced withholding rate
In some cases, a closing agent may act as a Qualified Substitute—meaning they handle everything on behalf of the buyer and certify that FIRPTA obligations have been met. This can simplify the process for all parties involved.
Can a seller get back money that was withheld under FIRPTA?
Yes. The 15% withheld is just a temporary hold to ensure tax is collected. It’s not necessarily the final amount the seller owes.
There are two ways to recover overpaid tax:
- File a US tax return in the year following the sale. This allows the seller to report their actual gain or loss and claim a refund if too much was withheld.
- Request a withholding reduction before the sale closes. This is done by submitting Form 8288-B, which tells the IRS why less should be withheld. If approved, the buyer can withhold a lower amount.
If no action is taken, the seller still needs to file a return to report the transaction, even if the full 15% was correct.
