FIRPTA

The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 is a federal law ensuring that foreign persons pay U.S. income tax when selling real estate. Because the IRS may have difficulty collecting taxes once a foreign seller leaves the country, the law shifts the responsibility to the buyer to withhold a portion of the sale proceeds as a "deposit" toward the seller's potential tax liability.  

The following information is deemed reliable, but not guaranteed.  

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Key Rules and Rates

• Standard Withholding Rate: Generally 15% of the gross sales price.

• Withholding Agent: The buyer is legally responsible for withholding the funds. If the buyer fails to do so, they may be held liable for the tax, plus penalties and interest.

• Timeline: The buyer must report the withholding and remit the funds to the IRS using Form 8288 and Form 8288-A within 20 days of the closing date. 

Common Exceptions and Reductions

Withholding may be reduced or eliminated in specific scenarios: 

• Primary Residence (under $300k): No withholding is required if the buyer intends to use the property as a residence for at least 50% of the time during the first two years, and the purchase price is $300,000 or less.

• Primary Residence ($300k - $1M): A reduced withholding rate of 10% applies if the buyer intends to use the property as a residence and the price is between $300,001 and $1,000,000.

• Non-Foreign Status: No withholding is needed if the seller provides a "Certification of Non-Foreign Status" (an affidavit) stating they are a U.S. citizen or resident alien (green card holder).

• Withholding Certificate: A seller can apply for a Withholding Certificate (Form 8288-B) if their actual tax liability is lower than the standard 15% rate. 

Who is a "Foreign Person"?

Under FIRPTA, a foreign person includes:

• Non-resident alien individuals.

• Foreign corporations, partnerships, trusts, or estates.

• Note: Resident aliens (green card holders) or those who meet the Substantial Presence Test are generally treated as U.S. persons and are not subject to FIRPTA. 

Buying or Selling a property that might trigger these rules? Knowing your role can help determine which IRS forms you need to prepare before closing.