FIRPTA Withholding: Why Foreign Sellers of U.S. Real Estate Should Plan Before Closing

Some U.S. property deals do not run into trouble because of price, financing, inspection issues, or timing.

They run into trouble because FIRPTA withholding was discussed too late.

For foreign sellers, international investors, real estate buyers, attorneys, brokers, and closing agents, FIRPTA is not a minor closing detail. It can directly affect cash flow at closing, IRS reporting, the buyer’s responsibilities, and the seller’s ability to claim credit for tax withheld.

The Foreign Investment in Real Property Tax Act, commonly known as FIRPTA, applies when a foreign person disposes of a U.S. real property interest. According to the IRS, FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests, and a disposition by a foreign person is generally subject to FIRPTA income tax withholding.

That is why FIRPTA should be addressed early in the transaction, not towards the closing.

What Is FIRPTA Withholding?

FIRPTA withholding is a U.S. tax withholding requirement that generally applies when a foreign person sells or otherwise disposes of a U.S. real property interest. A “disposition” can include more than a traditional sale; the IRS notes that it may include a sale, exchange, liquidation, redemption, gift, transfer, and other transactions.

For many real estate transactions, the key point is when a foreign seller transfers U.S. real estate, the buyer may be required to withhold a portion of the amount realized and report that withholding to the IRS.

This rule often surprises parties because the withholding is usually handled during the closing process, but it is not merely a closing formality. It is a federal tax compliance requirement that should be reviewed before the purchase agreement reaches its final stages.

Who Is Considered a Foreign Person for FIRPTA?

For FIRPTA purposes, the IRS defines a foreign person as a nonresident alien individual, a foreign corporation that has not made a valid election to be treated as a domestic corporation, a foreign partnership, a foreign trust, or a foreign estate. The IRS also states that a resident alien individual is not a foreign person for this purpose.

This definition matters because the transaction may look simple on the surface, while the ownership structure may be more complicated.

How Much Is FIRPTA Withholding?

The general FIRPTA withholding rate is 15% of the amount realized by the foreign seller. The IRS explains that the transferee must deduct and withhold tax on the total amount realized, and that the rate is generally 15%.

The phrase “amount realized” is important. It does not always mean only the seller’s net proceeds. The IRS states that amount realized includes cash paid or to be paid, the fair market value of other property transferred or to be transferred, and the amount of any liability assumed by the buyer or to which the property is subject immediately before and after the transfer.

This is one reason FIRPTA can create confusion. A seller may focus on expected net cash after mortgage payoff and closing costs, while FIRPTA withholding may be calculated using a broader “amount realized” concept.

FIRPTA Withholding Is Not Necessarily the Final Tax Due

One of the most misunderstood points about FIRPTA is that the amount withheld at closing is not necessarily the seller’s final U.S. tax liability.

The withholding amount may be higher than the final tax due, especially where the seller has significant tax basis, selling expenses, suspended losses, or other relevant tax attributes. In other cases, the seller may still have additional U.S. tax obligations after the transaction. The correct answer depends on the seller’s facts, tax residency, ownership structure, purchase price, adjusted basis, depreciation history, and other tax considerations.

That is why foreign sellers should not wait until closing to ask whether FIRPTA applies.

Who Is Responsible for FIRPTA Withholding?

In most cases, the buyer, also called the transferee, is the FIRPTA withholding agent. The IRS states that the buyer must determine whether the seller is a foreign person, and if the seller is foreign and the buyer fails to withhold, the buyer may be held liable for the tax.

This point is especially important for buyers, real estate attorneys, brokers, escrow officers, and closing agents. FIRPTA is not only the foreign seller’s issue. A buyer acquiring U.S. real estate from a foreign person may have withholding and reporting responsibilities.

Early coordination among the buyer, seller, CPA, attorney, and closing agent can reduce the risk of delays, incorrect withholding, missing taxpayer identification numbers, or post-closing notices.

Can FIRPTA Withholding Be Reduced or Eliminated?

In some cases, FIRPTA withholding may be reduced or eliminated, but this depends on the facts and must be handled correctly.

The IRS states that the amount required to be withheld from a disposition of a U.S. real property interest can be adjusted through a withholding certificate issued by the IRS. The buyer, buyer’s agent, or seller may request a withholding certificate, and the IRS generally acts within 90 days after receiving a complete application that includes taxpayer identification numbers for all parties.

This timing is another reason early FIRPTA planning matters. If a reduced withholding request is appropriate, waiting until closing may create unnecessary pressure or delay.

The IRS also lists situations where withholding may not be required, including when the buyer acquires the property for use as a residence and the amount realized is not more than $300,000, subject to specific requirements. The IRS also provides rules for reduced 10% withholding where the property is acquired as a residence and the amount realized is $1 million or less.

These exceptions are fact-specific. They should be reviewed carefully before anyone assumes FIRPTA withholding does not apply.

Why Taxpayer Identification Numbers Matter

FIRPTA compliance can also be delayed when the foreign seller or buyer does not have the required U.S. taxpayer identification number.

The IRS states that foreign sellers of U.S. real property interests need taxpayer identification numbers to request reduced withholding and to pay any required withholding. Individuals who do not qualify for Social Security numbers may need Individual Taxpayer Identification Numbers, or ITINs.

The IRS also notes that the taxpayer identification numbers, names, and addresses of both the seller and buyer must be provided on withholding tax returns, withholding certificate applications, notices of nonrecognition, or certain elections involving dispositions of U.S. real property interests.

If the seller does not have a TIN, the IRS may process the forms but may not provide the stamped Form 8288-A Copy B to the foreign transferor. That can affect the seller’s ability to claim credit for the withheld amount without additional documentation.

Why FIRPTA Should Be Discussed Before Closing

A timely FIRPTA conversation can help avoid:

• Delayed closings
• Incorrect withholding calculations
• Missing Forms 8288 or 8288-A
• Failure to request a withholding certificate in time
• Buyer liability concerns
• Cash flow surprises for the foreign seller
• Missing ITIN or EIN issues
• Confusion between withholding and final tax due

For cross-border real estate transactions, the best time to discuss FIRPTA is before the closing package is finalized. Ideally, the issue should be reviewed when the purchase agreement is being negotiated or when the seller’s foreign status first becomes known.

FIRPTA Checklist for Foreign Sellers, Buyers, and Closing Teams

Before closing a U.S. real estate transaction involving a foreign seller, the parties should consider the following:

1. Is the seller a foreign person for FIRPTA purposes?
2. Is the property a U.S. real property interest?
3. What is the correct amount realized for FIRPTA withholding?
4. Does the general 15% withholding rule apply?
5. Is there a valid exception or reduced withholding rule?
6. Should Form 8288-B be filed to request a withholding certificate?
7. Do the buyer and seller have the required taxpayer identification numbers?
8. Who is preparing Forms 8288 and 8288-A?
9. Has the closing agent coordinated with the buyer, seller, CPA, and attorney?
10. Has the foreign seller planned for the U.S. income tax return needed to claim credit for withholding?

FIRPTA Is a Planning Issue, Not Just a Closing Issue

FIRPTA withholding can significantly affect foreign sellers of U.S. real estate, international investors, buyers, and closing teams. The biggest mistake is treating it as a last-minute checkbox.

The buyer is often the withholding agent. Forms 8288 and 8288-A may need to be filed soon after closing. A reduced withholding certificate may require advance planning. A foreign seller may need a U.S. tax return to claim credit for tax withheld. And the amount withheld at closing may not equal the final U.S. tax due.

For international real estate transactions, early clarity can make the closing process smoother, reduce stress, and help all parties understand their responsibilities.

If you are a foreign investor selling U.S. real estate, a buyer acquiring property from a foreign seller, or a business involved in a cross-border real estate transaction, speak with a U.S. international tax CPA before closing. Early FIRPTA planning can help prevent delays, confusion, and unnecessary pressure at the closing table..

Important Notice

This article is intended for general informational purposes only. Nothing in this article is intended to constitute legal, tax, or accounting advice, nor should it be relied upon as such. Tax outcomes depend on individual facts, filing status, and tax year. Consider consulting a qualified tax professional. Readers should consult with their own professional advisors before taking any action based on the information discussed here.