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If you are a foreign individual or entity considering selling U.S. real estate, FIRPTA is a term you must understand. The Foreign Investment in Real Property Tax Act, or FIRPTA, can significantly impact your transaction. Many sellers and even buyers overlook the importance of FIRPTA compliance until it is too late. This blog walks you through what FIRPTA is, why it exists, how it works, and how Firpta Tax Returns can help you navigate it smoothly.
FIRPTA stands for the Foreign Investment in Real Property Tax Act. It is a U.S. tax law enacted in 1980 designed to ensure that foreign persons pay tax on gains from the sale of U.S. real estate. Under this law, if a foreign person sells U.S. real estate, the buyer is required to withhold a portion of the sales price and remit it to the IRS. This withholding is essentially a prepayment of the tax that may be owed on the gain from the sale.
Before FIRPTA, foreign investors could sell U.S. real estate and avoid paying taxes on the profits. The U.S. government enacted FIRPTA to close this loophole and ensure that foreign sellers are held to the same tax responsibilities as U.S. citizens. It helps the IRS collect taxes upfront rather than chase unpaid taxes after the transaction has been completed.
FIRPTA affects foreign individuals, corporations, partnerships, and trusts that sell U.S. real estate. But the responsibility of FIRPTA compliance doesn’t fall only on the seller. Buyers, agents, settlement officers, and withholding agents all share responsibility for ensuring that FIRPTA withholding is handled properly.
Here is a quick breakdown:
The standard withholding under FIRPTA is 15% of the gross sales price, not the gain. This means if a property sells for $500,000, the buyer may need to withhold $75,000, regardless of how much the seller profited.
There are exceptions, of course. For example:
When a FIRPTA withholding is made, the buyer (or withholding agent) must submit Form 8288 and Form 8288-A to the IRS along with the withheld funds. Form 8288-A is used to report the seller’s information and is later returned stamped by the IRS as proof of the amount withheld. This stamped form is essential if the seller wants to apply for a refund or claim the amount on their U.S. tax return.
Yes, in certain situations. If the foreign seller believes that the required 15% withholding exceeds their actual tax liability, they can apply for a withholding certificate from the IRS using Form 8288-B. This form essentially allows the IRS to approve a lower withholding amount before the sale closes.
However, timing is crucial. The IRS can take several weeks to process Form 8288-B, so it must be submitted early in the transaction process to avoid delays or overpayment.
If too much was withheld under FIRPTA, the seller can apply for a refund after the sale by filing a U.S. tax return (Form 1040NR or 1120-F, depending on entity type) for the year of the sale. They must include the stamped 8288-A form to prove the withholding occurred.
The refund process can take several months, and incorrect or incomplete forms will only slow things down further. That’s why having a professional team like Firpta Tax Returns handle the documentation makes a big difference.
FIRPTA compliance can feel overwhelming with all the forms, deadlines, and possible penalties. Firpta Tax Returns specializes in assisting foreign sellers with every step of the process, from preparing Form 8288-B and applying for withholding certificates to filing annual tax returns and tracking down IRS refunds.
Our services cover:
We ensure that your transaction remains compliant and that you never overpay what you owe.
Ignoring FIRPTA can lead to serious consequences such as delayed closings, IRS penalties, and loss of funds. Buyers who fail to withhold the required amount may be held liable for the tax, while foreign sellers may find it difficult to claim their refunds later without proper documentation.
Working with a qualified FIRPTA tax specialist ensures peace of mind and prevents avoidable financial setbacks.
Know Your FIRPTA Obligations Before You Sell
No matter if you are a foreign real estate investor planning your exit strategy or a buyer unsure of your responsibilities, understanding FIRPTA is key to a smooth transaction. FIRPTA withholding is not just a tax, it is a legal obligation that affects everyone involved in the deal.
With experienced guidance from Firpta Tax Returns, you can minimize your withholding, avoid penalties, and secure the refund you deserve. Let our team handle the paperwork so you can focus on what matters.
Explore our Foreign Investment in Real Property Tax Act service to get started today. We take the stress out of selling U.S. property as a foreign investor.
