What is Firpta?
Published on February 18, 2025
by Clark Stott
Reviewed by: Aya Takriti
Clark Stott has been with Expat Tax Online since 2015. Being a dual national based in the UK, Clark has unique experience helping US citizens (and Accidental Americans) become tax compliant via the Streamlined Tax Amnesty program. Clark likes to help Americans in the UK keep their tax situations as simple as possible to avoid harsh IRS treatment.
Table of Contents
How much tax is withheld under FIRPTA?
Under the Foreign Investment in Real Property Tax Act (FIRPTA), when a foreign seller sells U.S. real estate, the buyer must withhold 15% of the sale price and send it to the IRS. This is done to ensure that the seller pays any taxes owed on the sale.
Here’s how FIRPTA withholding works:
- The buyer (not the seller) is responsible for holding back 15% of the total purchase price and sending it to the IRS.
- This applies when a foreign person sells a US property or has it foreclosed or repossessed.
- The seller might qualify for a reduced withholding rate if their actual tax liability is lower than the withheld amount.
If too much tax is withheld, the seller can request a refund by filing a US tax return after the sale.
Are there any exceptions to FIRPTA withholding?
Yes, not all real estate sales require FIRPTA withholding. Some transactions qualify for exemptions or reduced rates:
- Low-cost home purchases – If the buyer plans to live in the home for at least 50% of the time for the next two years, and the sale price is US$300,000 or less, no withholding is required.
- Reduced withholding with IRS approval – The seller can apply for a withholding certificate (Form 8288-B) to lower or eliminate the tax before the sale.
- Nonforeign status certification – If the seller provides a Certification of Nonforeign Status, FIRPTA does not apply.
- Certain corporate and investment transactions – Sales involving US corporations, securities, or like-kind exchanges may be exempt.
What types of real estate are subject to FIRPTA?
FIRPTA applies to most types of real estate and real estate-related investments owned by non-US citizens or foreign companies.
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Homes, Apartments, and Rental Properties
- If you sell a house, condo, or apartment in the US and you are a foreign seller, FIRPTA applies.
- Whether the property is a vacation home, rental property, or investment property, withholding tax may be required.
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Commercial Real Estate
- Selling an office building, retail store, warehouse, or shopping center as a foreign investor falls under FIRPTA rules.
- Even if you own the property through a company, the tax may still apply.
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Land and Undeveloped Property
- If you own vacant land, farmland, or development sites in the US, FIRPTA withholding may be required when you sell.
- The sale is taxable even if no buildings or structures are on the land.
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Real Estate Investment Trusts (REITs)
- If you own shares in a US Real Estate Investment Trust (REIT), selling them could be subject to FIRPTA withholding.
- REITs own and manage rental properties, so selling your shares in a REIT fund may be treated like selling real estate.
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Shares in a US Real Estate Holding Company
- If a foreign investor owns shares in a US company where more than 50% of its value comes from real estate, the sale of those shares may be taxed under FIRPTA.
- This applies to corporations, trusts, and partnerships with significant US real estate holdings.
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Other Real Estate Investments
- Even if you are not directly selling property, FIRPTA may still apply if you sell an investment tied to US real estate, such as an interest in a real estate partnership or certain trusts.
What does this means for foreign sellers?
- FIRPTA applies to most real estate sales by foreign individuals or companies, including homes, land, commercial buildings, and real estate investments.
- If you sell US real estate, a portion of the sale price may be withheld to cover potential US taxes.
- There are exemptions and ways to reduce withholding, so it’s best to consult a tax professional before selling.
Even if a seller is not directly selling a property, FIRPTA may apply if they are selling an investment linked to US real estate.
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Who is required to comply with FIRPTA withholding?
FIRPTA rules apply to foreign sellers of US real estate, but buyers and other parties are also responsible for making sure the tax is handled correctly.
People and businesses that must comply with FIRPTA include:
- Foreign sellers – Any non-US citizen or foreign entity selling real estate in the US must follow FIRPTA rules.
- Buyers – The buyer (not the seller) is responsible for withholding and sending the required tax to the IRS.
- Withholding agents – This includes real estate agents, attorneys, and escrow officers who help process the sale.
- Qualified substitutes – In some cases, a closing agent or tax professional can act as a substitute to ensure FIRPTA compliance.
To complete a FIRPTA transaction properly:
- Foreign sellers need a tax ID number (ITIN or TIN) – The seller must provide a valid tax identification number for IRS reporting.
- Buyers must file the correct forms – Buyers must complete Form 8288 and Form 8288-A and submit them to the IRS.
- Sellers can apply for a withholding reduction – If a seller believes too much tax is being withheld, they can file Form 8288-B to request a lower amount.
Since FIRPTA enforcement has increased under laws like the PATH Act of 2015, it’s crucial to follow the rules carefully to avoid penalties, tax issues, or IRS audits.
How do I report and pay FIRPTA withholding tax?
It depends if you are the buyer or seller. The buyer is responsible for handling FIRPTA withholding and ensuring the correct amount is sent to the IRS. Here’s how it works:
- Fill out IRS Form 8288 and Form 8288-A – These forms document the sale and tax withholding.
- Send the withheld tax to the IRS – The buyer must send 15% of the sale price to the IRS within 20 days of closing.
- Provide Form 8288-A to the seller – This serves as proof that the withholding tax has been paid.
- Apply for a withholding certificate (if needed) – If the seller believes the amount withheld is too high, they can file Form 8288-B to reduce it.
- File a tax return to claim a refund – If the seller overpays FIRPTA tax, they can file a U.S. tax return to request a refund.
Because FIRPTA rules can be complicated, sellers and buyers are recommended to work with a tax expert to avoid mistakes, penalties, or IRS delays.
What are the penalties for not following FIRPTA rules?
If FIRPTA withholding taxes are not handled correctly, both the buyer and the person responsible for withholding (often the closing agent) could face serious penalties from the IRS.
Here’s what happens if FIRPTA rules are not followed:
- The buyer could owe the full tax amount – If the required tax is not withheld, the buyer may be held personally responsible for paying it.
- Interest and penalties will be added – If the IRS does not receive the correct withholding tax on time, interest charges and late fees will apply.
- The IRS may place a lien on the property – If the tax isn’t paid, the IRS can file a claim against the property to collect what is owed.
Some common mistakes that can lead to penalties include:
- Forgetting to withhold the tax – The buyer is responsible for ensuring FIRPTA taxes are taken out of the sale price before the seller receives payment.
- Sending the tax payment late – FIRPTA taxes must be sent to the IRS within 20 days of closing.
- Filing the wrong IRS forms – Forms 8288 and 8288-A must be completed correctly and submitted on time.
What is the role of a closing agent in FIRPTA transactions?
A closing agent (also called a settlement agent or escrow officer) helps handle real estate transactions and ensures that FIRPTA withholding tax is correctly collected and sent to the IRS.
The closing agent’s role in a FIRPTA transaction includes:
- Checking if FIRPTA applies – They verify whether the seller is a foreign person and if FIRPTA withholding is required.
- Collecting the withholding tax – If FIRPTA applies, they withhold 15% of the sale price and make sure it’s not mistakenly given to the seller.
- Filing the required IRS forms – The closing agent submits Forms 8288 and 8288-A to the IRS and gives the seller a copy.
- Helping with exemptions or reduced tax withholding – If the seller qualifies for an exemption or lower tax rate, the agent may assist with getting a withholding certificate.
Sometimes, a closing agent acts as a Qualified Substitute, meaning they certify that FIRPTA requirements have been met so the buyer doesn’t have to worry about withholding taxes.
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