When Does FIRPTA Apply to Real Estate Transactions? by Joel G. Young, JD, LLM
Posted on April 29, 2025
by
Joel Young
The Foreign Investment in Real Property Tax Act (FIRPTA) is a U.S. law enacted in 1980 to ensure foreign owners of U.S. real property interests pay their fair share of federal taxes on the profits they may yield from the eventual sale or disposition of those properties. It requires advanced planning and specific actions by domestic buyers and foreign sellers, including individuals and legal entities. Here we discuss some of the law’s key concepts and the requirements of all involved parties under the law.
Important Definitions
U.S. tax laws define a foreign owner of U.S. property as a non-resident alien (NRA) individual or foreign corporation, partnership, trust or estate that has not made an election to be treated as a domestic corporation, foreign partnership, foreign trust or foreign estate. As tax residents of other countries, they generally must pay U.S. taxes only on income they earn from U.S. sources. This includes their ownership or rights to share in the appreciation value or proceeds and profits generated by U.S. real property interests, such as land and residential and commercial real estate located in the U.S. Real Property Interest (USRPI) encompasses various forms of ownership in real estate within the United States or the U.S. Virgin Islands. This definition is not limited to land or buildings; it extends to interests in mines, wells, and other natural deposits as well as partnerships and corporations that predominately own other USRPIs. Additionally, it includes personal property tied to real property, such as agricultural equipment.
How does FIRPTA Work?
When an NRA or foreign entity disposes of U.S. real property interests, the U.S. buyer is required at closing to withhold 15 percent of the gross sales price, which includes the amount the buyer pays to the seller, the fair market value (FMV) of other transferred property and the amount of any liability the buyer assumes. In this sense, the FIRPTA tax can be considered an NRA’s or foreign corporation’s pre-payment of taxes on the gross amount they receive for the disposition, sale, transfer, exchange or liquidation of U.S. real property interests. By contrast, foreign corporations that distribute U.S. real property interests to their foreign shareholders must withhold a FIRPTA tax equal to 21 percent of the gain.
Buyer’s Responsibilities
Buyers bear the burden of determining whether a seller is an NRA or a foreign corporation, partnership, trust or estate subject to FIRPTA tax or if they qualify for one of several exemptions. More specifically, they must request that the seller provides them with certification that the seller is an NRA or non-foreign entity. Technically, this requirement also applies to sales of corporate stock for which the buyer should request certification from the seller that the corporation is not a U.S. real property holding corporation.
Sellers also are responsible for withholding the tax on acquisitions of U.S. real property interest from foreign persons and paying it to the IRS within 20 days of the property disposition along with a U.S. withholding tax return on IRS Form 8288. The filing must include the taxpayer identification numbers (TINs) for both the buyer and foreign seller, a description of the property, the amount subject to withholding, the amount withheld and the date of transfer.
FIRPTA does provide several exceptions to the withholding requirements on real property transfers. These include circumstances when the buyer acquires the property for use as a personal residence and the sales price is less than $300,000 or when the amount the transferor realizes on the transfer of a U.S. real property interest is zero.
Buyers that do not meet these exceptions or fail to conduct any of the required activities may incur penalties and interest as well as a potential liability for the FIRPTA tax they failed to withhold or an IRS seizure of the property.
Seller’s Responsibilities
First and foremost, foreign sellers of U.S. real property interests must recognize their U.S. tax reporting and payment responsibilities, especially as they apply to FIRPTA. They should expect to receive from the IRS a copy of the buyer’s statement of withholding on certain dispositions by foreign persons, which they may use to file their U.S. federal income tax return. Should the amount withheld on Form 8288 exceed the foreign seller’s actual tax liability, they may claim a refund with the IRS.
About the Author: Joel G. Young, JD, LLM, is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax, income and estate tax planning and compliance services for high-net-worth families and closely held businesses with international operations. He can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2000 or info@bpbcpa.com.
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