Explore Tax Savings: How to Legally Avoid FIRPTA Withholding in 2025?

FIRPTA withholding exemption

When a foreign person sells U.S. real estate, the Internal Revenue Service (IRS) generally requires the buyer to withhold 15% of the gross sales price under the Foreign Investment in Real Property Tax Act (FIRPTA). However, not every transaction is subject to this withholding—certain exemptions exist that could save sellers thousands of dollars. Understanding FIRPTA withholding exemption rules can help foreign investors protect their profits and comply with IRS regulations.

Table of Contents:

  1. What Is FIRPTA Withholding?
  2. Who Qualifies for FIRPTA Withholding Exemption?
  3. Common Scenarios Where FIRPTA Exemption Applies
  4. How to Apply for a Withholding Certificate
  5. Required Documentation and Timelines
  6. Table: FIRPTA Exemption Eligibility Checklist
  7. What Happens If You Don’t Apply?
  8. Conclusion & CTA

What is FIRPTA Withholding?

FIRPTA, or the Foreign Investment in Real Property Tax Act, mandates that buyers withhold a percentage of the total purchase price when a foreign person sells a U.S. property. This is meant to ensure that the seller pays any potential capital gains taxes owed to the IRS. The standard withholding rate is 15% of the gross sale amount.

Who Qualifies for FIRPTA Withholding Exemption?

Exemptions are granted under certain conditions where the IRS determines there’s little to no tax liability. The most common exemption cases include:

  • The property is sold for $300,000 or less and the buyer intends to use it as a residence.
  • The seller files Form 8288-B and receives a withholding certificate showing a lower or zero tax liability.
  • The seller qualifies for a non-recognition transaction (e.g., a 1031 exchange).

 

Common Scenarios Where FIRPTA Exemption Applies

Here are a few real-life examples where FIRPTA exemptions may apply:

  • Residential Exemption: A Canadian citizen sells a Florida condo for $290,000 to a U.S. couple who plan to live there full-time.
  • Zero Gain: A foreign seller bought a property for $800,000 and sells it for $795,000—indicating no gain.
  • Tax Treaty Benefits: In some cases, tax treaties between the U.S. and the seller’s country of residence can reduce or eliminate FIRPTA liability.

 

How to Apply for a Withholding Certificate?

If you think you qualify for an exemption or reduced withholding, you must file Form 8288-B with the IRS before the transaction is completed. This form requests a FIRPTA withholding certificate. It can take the IRS up to 90 days to process the request, so timely filing is essential.

Required Steps:

  1. Prepare Form 8288-B.
  2. Attach documentation supporting exemption (e.g., purchase contract, proof of residency use by buyer, etc.).
  3. Send the application to the IRS before the closing date.
  4. Await IRS decision before remitting any withholding amount.

Required Documentation and Timelines

Document Purpose Deadline
Form 8288-B Request for reduced or zero withholding Before closing
Copy of Sales Contract Verifies buyer’s intent to reside With Form 8288-B
ITIN Application (Form W-7) Required if seller doesn’t have an ITIN File with tax return
Supporting Evidence Proof of no gain or use as residence Alongside Form 8288-B

Note: Delays in filing can result in automatic withholding.

What Happens If You Don’t Apply?

If no exemption request is submitted, the buyer must withhold the full 15% and send it to the IRS. You can still file for a FIRPTA withholding tax refund later, but this can take months and will require a full U.S. tax return. It’s far better to handle the exemption process upfront and keep your capital in hand.

Don’t Let FIRPTA Eat Into Your Profits

FIRPTA withholding doesn’t have to be an automatic cost of doing business as a foreign investor. With the right documentation and a proactive approach, many sellers can legally avoid or reduce the withholding altogether. Whether you qualify for a residential exemption or zero-gain sale, filing for a withholding certificate in advance can save you time, money, and stress.

Our experts at Firpta Tax Returns specialize in helping foreign sellers handle every step of the process. So, apply now and avoid unnecessary tax withholding!