The Foreign Investment in Real Property Tax Act (FIRPTA) is a U.S. law that affects real estate transactions when a foreign person sells U.S. real property. It requires buyers to withhold tax at settlement to ensure the IRS collects taxes owed on the sale. Below is a clear overview of the current FIRPTA rules.
Who Is Considered a “Foreign Person”?
- Nonresident alien individuals
- Foreign corporations
- Foreign partnerships, trusts, or estates
- Domestic corporations electing to be treated as foreign under certain rules
What Property Does FIRPTA Cover?
- U.S. real property interests (USRPI), including:
- Land, buildings, and natural deposits in the U.S. or U.S. Virgin Islands
- Certain personal property associated with real property (e.g., mining equipment, farm machinery)
- Stock in a U.S. Real Property Holding Corporation (USRPHC) — where U.S. real property makes up at least 50% of assets
Withholding Requirements
- General rule: Buyer must withhold 15% of the amount realized (sale price plus assumed liabilities).
- Who withholds? The buyer (or transferee) is responsible for deducting and sending the tax to the IRS.
- Forms required: IRS Forms 8288 and 8288-A, filed within 20 days of closing.
- NEW (effective September 30, 2025): All FIRPTA tax payments (and most federal tax payments) must be made electronically via the IRS’s Electronic Federal Tax Payment System (EFTPS). Paper checks will no longer be accepted, with limited exceptions. Capitol Title can coordinate what is required to ensure the Buyer fulfills their obligation under these rules.
Exceptions & Reduced Withholding
- $300,000 or less + residence use → No withholding required.
- Over $300,000 and up to $1,000,000 + residence use → Withholding reduced to 10%.
- Above $1,000,000 → Withholding stays at 15%, even if used as a residence.
- Nonrecognition transactions (like a 1031 exchange) → Possible exemption or reduction if IRS grants a withholding certificate.
- Publicly traded stock in a corporation that is not a USRPHC → Exempt.
What Sellers Should Know
- The withholding is not the final tax. It’s a prepayment applied against the actual U.S. tax owed.
- The foreign seller must still file a U.S. tax return to report gain or loss.
- Sellers can apply in advance for a withholding certificate (Form 8288-B) to reduce or eliminate withholding if the actual liability is less.
Key Takeaway for Clients
- If you are purchasing U.S. real estate from a foreign seller, FIRPTA rules likely apply.
- Buyers must handle withholding correctly to avoid penalties. Capitol Title can coordinate what is required to ensure the Buyer fulfills their obligation under these rules.
- Importantly, starting September 30, 2025, FIRPTA withholding payments must be transmitted electronically (often via EFTPS), so plan early to ensure accounts and taxpayer identification numbers are set up in time.
- Sellers should plan ahead to avoid unnecessary over-withholding.
