What Is FIRPTA?
The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980 to ensure that foreign persons pay US tax on gains from the sale of US real property. Without FIRPTA, a foreign seller could take their proceeds and leave the country without ever paying US tax on the gain.
To prevent this, FIRPTA requires the buyer (or their agent) to withhold a portion of the purchase price at closing and remit it to the IRS. This withholding acts as a prepayment of the seller's eventual tax liability.
Standard withholding rate on gross sales price
Who Is Affected by FIRPTA
FIRPTA applies when:
- The seller is a foreign person (non-US citizen, non-resident alien, foreign corporation, foreign partnership, foreign trust, or foreign estate)
- The property sold is a US real property interest (USRPI)
What Is a US Real Property Interest?
A USRPI includes:
- Direct ownership of US real estate (houses, condos, land, commercial buildings)
- Interests in US real property (leaseholds, options to acquire real property, life estates)
- Stock in a US Real Property Holding Corporation (USRPHC) - a US corporation where more than 50% of the value consists of US real property
- Partnership interests (to the extent attributable to US real property)
LLC-Owned Real Estate
If you own US real estate through a single-member LLC (disregarded entity) and sell the property, FIRPTA applies to you as the foreign owner. If the LLC is taxed as a partnership with multiple members, FIRPTA applies based on the foreign members' allocable shares. If the LLC elected to be taxed as a corporation, different rules may apply.
FIRPTA Withholding Rates
The standard FIRPTA withholding rate is 15% of the gross sales price. However, different rates apply in certain situations:
| Situation | Withholding Rate |
|---|---|
| Standard rate | 15% of gross sales price |
| Buyer will use as residence and sales price is $300,000 or less | 0% (exempt) |
| Buyer will use as residence and sales price is over $300,000 but not more than $1,000,000 | 10% |
| Withholding certificate approved by IRS | Reduced rate or exemption per certificate |
| Foreign corporation distribution (liquidation or redemption) | 21% |
Residence Exemption
If the buyer intends to use the property as their residence (not rental or investment) and the sales price is $300,000 or less, no FIRPTA withholding is required. The buyer must sign an affidavit confirming their intent to use the property as a residence.
How FIRPTA Withholding Works
Here is how FIRPTA operates at a typical real estate closing:
FIRPTA Withholding Process
The buyer and seller execute the real estate transaction. The closing agent (title company, escrow company, or attorney) handles the funds.
The buyer or closing agent calculates 15% of the gross sales price (not the net proceeds, not the gain - the full sale price).
The withheld amount is deducted from the seller's proceeds and held by the closing agent.
Within 20 days of closing, the buyer (or agent) files Form 8288 and Form 8288-A with the IRS, along with the withheld amount.
The seller files a US tax return (Form 1040-NR for individuals) to report the actual gain and either claim a refund of excess withholding or pay additional tax.
Example: Standard Withholding
FIRPTA Calculation Example
You (a Canadian citizen) sell a Florida condo for $500,000. You purchased it for $350,000 and have no other adjustments.
Withholding calculation: $500,000 x 15% = $75,000 withheld
Actual gain: $500,000 - $350,000 = $150,000
Actual tax (estimated): $150,000 x 15% capital gains rate = $22,500
Refund available: $75,000 - $22,500 = $52,500 refund
You would receive $52,500 back when you file your Form 1040-NR, but this refund may take 6-12 months.
Reducing FIRPTA Withholding
The 15% withholding rate often significantly exceeds the actual tax due. You can apply for reduced withholding before closing by submitting an application to the IRS.
Withholding Certificate Application
To request reduced or eliminated withholding, the seller (or buyer) files Form 8288-B (Application for Withholding Certificate) with the IRS before or at closing.
The IRS will issue a withholding certificate specifying the reduced amount that must be withheld. This is typically based on:
- The seller's actual anticipated tax liability
- Whether the transaction will result in zero or minimal gain
- Whether a nonrecognition provision applies (like-kind exchange)
Processing Time
The IRS typically takes 90 days or longer to process withholding certificate applications. If you are selling property, apply as early as possible - ideally when you first list the property or sign the purchase contract. The closing agent can hold funds in escrow pending the IRS decision.
When to Apply for Reduced Withholding
Consider applying for a withholding certificate if:
- You expect little or no gain (purchased recently, made improvements, or property value decreased)
- You are doing a 1031 like-kind exchange and deferring gain
- The 15% withholding would create liquidity problems (e.g., you need proceeds for a down payment elsewhere)
- You are a US person and can provide certification (no withholding required)
FIRPTA Exemptions
FIRPTA withholding does not apply if:
| Exemption | Requirement |
|---|---|
| Seller is a US person | Seller provides Form W-9 certifying US status |
| Buyer's residence exemption | Sales price $300K or less, buyer will use as residence |
| Non-USRPHC stock | Seller certifies corporation is not a USRPHC |
| Treaty exemption | Applicable tax treaty exempts the gain |
| Withholding certificate | IRS issues certificate reducing withholding to zero |
| Publicly traded stock | Stock disposed of through established securities market |
Seller Certification
If you are actually a US person (US citizen or resident alien), you can provide an affidavit to the buyer certifying that you are not a foreign person. This eliminates the withholding requirement. The buyer should request this certification (sometimes called a "FIRPTA affidavit" or "non-foreign affidavit").
Required IRS Forms
| Form | Purpose | Who Files | Deadline |
|---|---|---|---|
| Form 8288 | Report FIRPTA withholding | Buyer (or agent) | 20 days after closing |
| Form 8288-A | Statement of withholding on foreign person | Buyer (or agent) | 20 days after closing |
| Form 8288-B | Application for withholding certificate | Seller or buyer | Before or at closing |
| Form 1040-NR | Nonresident income tax return | Seller | April 15 (or extension) |
| Form 8833 | Treaty-based return position | Seller (if claiming treaty) | With Form 1040-NR |
Getting Your Refund
If the FIRPTA withholding exceeds your actual tax liability (which is common), you can claim a refund by:
- Filing Form 1040-NR (US Nonresident Alien Income Tax Return) for the year of sale
- Reporting the sale on Schedule D (Capital Gains and Losses)
- Calculating your actual tax on the gain
- Claiming the withholding as a payment (attach Copy B of Form 8288-A)
- Requesting the refund of the difference between withholding and actual tax
Refund Processing Time
The IRS typically processes FIRPTA refunds in 6-12 months, sometimes longer. If you need your money sooner, apply for reduced withholding before closing rather than waiting for a refund after filing.
ITIN Requirement
To file a US tax return and claim a refund, you need either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). Most foreign sellers do not have an SSN and must apply for an ITIN by filing Form W-7 with their tax return.
Planning Strategies
1. Use an LLC or Corporation
Holding real estate in a US LLC or corporation does not eliminate FIRPTA, but it may provide planning opportunities:
- Single-member LLC: FIRPTA applies as if you owned the property directly
- Multi-member LLC (partnership): Each foreign member's share of gain is subject to FIRPTA
- Corporation: Different rules apply; may face 21% corporate rate plus potential FIRPTA on share sales
2. Consider a 1031 Exchange
If you sell one US property and purchase another "like-kind" property (another US real estate investment), you may defer the gain under IRC Section 1031. The FIRPTA withholding can be reduced or eliminated with a proper withholding certificate application.
3. Plan for Basis
Your taxable gain is reduced by your adjusted basis. Keep records of:
- Original purchase price
- Closing costs from purchase
- Capital improvements (not repairs)
- Depreciation taken (if rental property)
- Selling costs
4. Treaty Benefits
Most US tax treaties do not exempt real estate gains from US taxation. However, some treaties may provide reduced rates or other benefits. Consult the specific treaty between the US and your country.
Common FIRPTA Mistakes
- Not planning ahead: Waiting until closing to address FIRPTA leaves no time for a withholding certificate
- Wrong withholding amount: Using net proceeds instead of gross sales price
- Missing the 20-day deadline: Forms 8288/8288-A must be filed within 20 days
- Not filing a tax return: You cannot get a refund without filing Form 1040-NR
- No ITIN: Without an ITIN, you cannot file a return or receive a refund
- Assuming LLC protects you: FIRPTA still applies to foreign-owned LLCs
Buyer Liability
If the buyer fails to withhold and remit FIRPTA taxes, the buyer is personally liable for the amount that should have been withheld, plus interest and penalties. This is why most title companies and closing agents are careful about FIRPTA compliance.