What Is FIRPTA in Real Estate: Withholding, Forms, and Refunds

FIRPTA, the Foreign Investment in Real Property Tax Act, is a federal law that requires the buyer in a U.S. real estate transaction to withhold a portion of the sale price and send it to the IRS whenever the seller is a foreign person. The standard rate is 15 percent of the gross sale price, with reduced rates or a full exemption available in some residential sales.¹ Before FIRPTA, a foreign owner could sell U.S. property and leave the country without paying capital gains tax on the profit. The withholding system shifts that risk to the buyer, who becomes responsible for collecting a preliminary tax payment at closing.

When FIRPTA Applies

FIRPTA is triggered by two things at once: a foreign seller, and a U.S. real property interest changing hands. If either piece is missing, the law doesn’t apply.

Who Counts as a Foreign Seller

A “foreign person” for FIRPTA purposes includes non-resident alien individuals, foreign corporations, foreign partnerships, foreign trusts, and foreign estates. For individuals, the test is tax residency, not citizenship. You are a U.S. resident for tax purposes if you hold a green card or meet the substantial presence test, which counts your physical days in the country over a three-year window.² Anyone who fails both tests is a non-resident alien and, for FIRPTA, a foreign seller.

Entities formed under foreign law are foreign by default. One trap catches people off guard: a U.S. single-member LLC owned by a foreign individual is disregarded for tax purposes, so the IRS looks through the LLC and treats the foreign owner as the seller. The affidavit that clears withholding has to come from the owner, not the LLC.

What Property Is Covered

A “U.S. real property interest” covers more than houses and land. It includes buildings, condominiums, co-ops, and interests in mines, wells, and other natural deposits located in the United States or the U.S. Virgin Islands. It also reaches ownership interests in a domestic corporation that holds substantial U.S. real estate, unless the seller can show the corporation was not a U.S. real property holding corporation during the relevant period.¹ Selling shares in a closely held company whose main asset is U.S. real estate can trigger FIRPTA even though it doesn’t look like a real estate deal.

How Much the Buyer Withholds

Withholding is calculated on the gross sale price, not the seller’s profit. The rate depends on the price and how the buyer will use the property.

15 percent applies to all sales by foreign persons unless an exception fits. This is the default for investment property, commercial property, and any residence priced above $1,000,000.¹
10 percent applies when the buyer is acquiring the property as a personal residence and the price is more than $300,000 but not more than $1,000,000.³
Zero applies when the buyer is acquiring the property as a residence and the price is $300,000 or less.³

The 10 percent and zero rates come with a use requirement. The buyer must have definite plans to live in the property at least 50 percent of the days it is used by anyone during each of the first two 12-month periods after closing.³ If the plan is to rent it out or hold it for investment, the full 15 percent applies no matter the price.

When the property has both foreign and domestic co-owners, the buyer withholds only on the portion of the sale price allocated to the foreign seller, based on each owner’s capital contribution. Married couples are treated as contributing 50 percent each.³

How the Buyer Confirms the Seller Isn’t Foreign

The cleanest way for a buyer to avoid withholding is to get a certification of non-foreign status, sometimes called a FIRPTA affidavit, from the seller before closing. It’s a sworn statement that includes the seller’s taxpayer identification number and confirms the seller is not a foreign person.¹ Without it, the buyer has to treat the seller as foreign and withhold.

The affidavit doesn’t have to pass directly between the parties. A “qualified substitute,” typically the closing attorney, title company, or the buyer’s agent, can receive it and then give the buyer a statement under penalty of perjury confirming the affidavit is on file.¹ A qualified substitute who knows the affidavit is false and stays quiet becomes personally liable for the withholding tax.

Reducing or Eliminating Withholding With Form 8288-B

A foreign seller whose actual U.S. tax on the sale will be less than 15 percent of the gross price can apply to the IRS for a withholding certificate on Form 8288-B. Either the buyer or the seller may file it, and the IRS generally acts on a complete application within 90 days.⁴

The application has to rest on a specific ground: that the seller is exempt or the transaction qualifies for nonrecognition (a like-kind 1031 exchange, for example), that the seller’s maximum tax liability is lower than the default withholding, or that the sale is on installments.⁵

Timing matters. If the application is submitted to the IRS on or before the closing date, the buyer still withholds at closing but does not have to send the funds to the IRS until 20 days after the IRS mails its certificate or a denial notice.⁵ The seller has to notify the buyer in writing, on or before the transfer date, that the application was filed. An incomplete application, such as one missing an estimated transfer date, is rejected outright.

There are also transactions that never trigger withholding in the first place. Sales of stock in a domestic corporation whose shares are regularly traded on an established securities market are exempt, as are interests in publicly traded partnerships and trusts, subject to limits on large private blocks.⁶

Filing After Closing

The buyer has 20 days from the date of transfer, generally the day the deed is signed and money changes hands, to file with the IRS and send in the withheld amount.⁴ Two forms go together:

Form 8288 is the withholding tax return that reports and transmits the money.⁷
Form 8288-A is a companion statement for each foreign seller. Copies A and B are attached to Form 8288 when it’s filed.⁴

Both forms need valid taxpayer identification numbers for buyer and seller. A foreign seller without an SSN or ITIN applies for one on Form W-7.⁸ Buyers may transmit the withheld funds electronically through EFTPS, though the paper filing of Forms 8288 and 8288-A still applies.⁹

Once the IRS processes the return, it stamps Copy B of Form 8288-A and mails it to the foreign seller. That stamped copy is the seller’s proof the tax was paid and is what the seller uses to claim credit on their own return.

How the Foreign Seller Gets Money Back

FIRPTA withholding is a prepayment, not the final tax. Actual U.S. capital gains tax on the sale is based on the seller’s gain, not the gross price, so withholding often exceeds what the seller actually owes, especially when the property has a high basis or the gain is small.

To reconcile, the foreign seller files a U.S. nonresident income tax return, Form 1040-NR, for the year of the sale. The seller reports the actual gain or loss and claims credit for the withholding using the stamped Form 8288-A. If withholding was higher than the tax owed, the IRS refunds the difference. Skip the return, and any refund is forfeited.

What Happens If the Buyer Doesn’t Comply

The compliance risk sits squarely on the buyer. If withholding was required and the buyer didn’t do it, the IRS can collect the full amount that should have been withheld, plus interest, directly from the buyer.⁴ The buyer ends up paying the seller’s tax out of pocket.

On top of that, the general failure-to-file and failure-to-pay penalties apply. Late filing runs 5 percent of the unpaid tax per month up to 25 percent, and late payment runs 0.5 percent per month up to 25 percent.¹⁰ Interest accrues until the balance is paid. A buyer who willfully fails to collect and pay over the tax commits a felony punishable by up to $10,000 in fines and up to five years in prison.¹¹

Agents and qualified substitutes who know a non-foreign affidavit is false and don’t tell the buyer are also on the hook, up to the amount of their compensation from the deal.¹

State Withholding Is Separate

FIRPTA is federal. Many states impose their own withholding on nonresident sellers of real property, generally in the range of about 2 to 9 percent of the sale price, on top of the federal amount. States with no income tax typically do not. Clearing FIRPTA does not clear the state obligation, and missing a state rule triggers its own penalties, so both buyer and seller should check the rules of the state where the property sits.

1
Office of the Law Revision Counsel. 26 USC 1445 – Withholding of Tax on Dispositions of United States Real Property Interests
2
Internal Revenue Service. Determining an Individual’s Tax Residency Status
3
Internal Revenue Service. FIRPTA Withholding
4
Internal Revenue Service. Instructions for Form 8288
5
Internal Revenue Service. Form 8288-B Application for Withholding Certificate
6
Internal Revenue Service. Exceptions From FIRPTA Withholding
7
Internal Revenue Service. About Form 8288, U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons
8
Internal Revenue Service. ITIN Guidance for Foreign Buyers/Sellers of U.S. Property
9
Internal Revenue Service. Using EFTPS to Submit Payments
10
Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
11
Office of the Law Revision Counsel. 26 USC 7202 – Willful Failure to Collect or Pay Over Tax