What FIRPTA is and who it applies to
FIRPTA — the Foreign Investment in Real Property Tax Act — is a U.S. law that ensures the IRS collects tax when a foreign person sells a U.S. real property interest. Because the foreign seller may leave the country after the sale and never pay U.S. tax, Congress put the collection obligation on the buyer.
Under FIRPTA, when a buyer purchases U.S. real property from a foreign person, the buyer must withhold 15% of the gross sale price and remit it to the IRS using Form 8288 and 8288-A within 20 days of closing. "Foreign person" includes nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, and foreign estates. U.S. citizens and green card holders are not foreign persons for FIRPTA purposes, regardless of where they live.
Note: the 15% withholding is not necessarily the actual tax owed — it is a prepayment. The foreign seller files a U.S. tax return and either gets a refund (if actual tax is less than withheld) or pays additional tax (if actual tax is more).
Exceptions and reduced withholding rates
Not every sale triggers full 15% withholding. Important exceptions include:
Personal use home under $300,000: No withholding is required if the buyer will use the property as a principal residence and the price is $300,000 or less.
Personal use home between $300,000 and $1,000,000: Reduced 10% withholding applies if the buyer will use the property as a principal residence.
Withholding certificate: A foreign seller can apply to the IRS for a reduced withholding certificate (Form 8288-B) if the actual U.S. tax owed on the gain is less than 15% of the gross price. The IRS may issue a certificate reducing the withholding to the actual tax amount. This process typically takes 90 days or more, so it should be started well before closing.
No gain recognized: If the seller has a tax treaty exemption or if there is no U.S. tax owed on the gain, the withholding obligation may be reduced or eliminated through the certificate process.
Tax rules for foreign rental property owners
For foreign persons who own U.S. rental property (as opposed to just selling it), there are ongoing U.S. tax obligations. Rental income from U.S. property is generally subject to U.S. tax. By default, the U.S. payer (a tenant or property manager) must withhold 30% of the gross rent for a foreign landlord.
However, a foreign landlord can elect under Section 871(d) to treat the U.S. rental income as effectively connected income (ECI), which means it is taxed on a net basis (gross rent minus deductible expenses) at regular graduated U.S. tax rates instead of the 30% gross withholding. This election is made on a U.S. tax return and is almost always more favorable than the 30% gross withholding — especially for rental properties with significant depreciation deductions.
Frequently asked questions
Does the buyer or seller pay the FIRPTA withholding?
The buyer is legally responsible for withholding and remitting the 15% to the IRS. If the buyer fails to withhold, the buyer becomes liable for the tax.
Can a foreign seller get a refund of FIRPTA withholding?
Yes. The foreign seller files a U.S. nonresident tax return (Form 1040-NR), reports the actual gain, and receives a refund if the 15% withholding exceeded the actual tax owed.
Does FIRPTA apply if the seller claims a tax treaty exemption?
Possibly not, but the seller must still go through the withholding certificate process (Form 8288-B) to have the withholding reduced. The buyer cannot simply skip withholding based on the seller's claim of a treaty.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.