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Foreign investors who sell U.S. real estate are often surprised when the IRS requires withholding of a portion of the sales proceeds. This is due to the Foreign Investment in Real Property Tax Act, commonly known as FIRPTA. However, not every transaction is subject to this tax. There are specific FIRPTA exemption rules that can eliminate or reduce the withholding obligation if the sale meets certain conditions.
Understanding these exemptions can help foreign sellers avoid unnecessary tax payments and ensure compliance with IRS regulations. This blog explains the key FIRPTA exemption rules, how to apply for them, and what forms are needed to claim these exemptions correctly.
FIRPTA was enacted to ensure that foreign individuals and entities pay taxes on gains realized from the sale of U.S. real property. Normally, U.S. citizens or residents are taxed on these profits during income tax filing, but foreign sellers might not file returns. To prevent tax avoidance, FIRPTA requires the buyer to withhold 15% of the sale price and remit it to the IRS.
However, this withholding is not always necessary. The IRS provides several exemptions that apply when certain conditions are met, particularly when the property will be used as a primary residence or the gain is exempt under specific treaty or legal conditions.
Here are the main exemption rules foreign sellers and buyers should be aware of:
These rules are designed to ensure that genuine property transactions are treated fairly while maintaining IRS oversight over taxable gains.
FIRPTA withholding applies when:
Even if the sale involves a small property or a short-term investment, withholding applies unless a valid exemption is documented and approved.
Here are a few real-world situations where FIRPTA exemptions can apply:
Each exemption must be supported with documentation and verified by the IRS or a certified acceptance agent to ensure legitimacy.
Claiming an exemption requires following a structured process:
During this period, the buyer may still withhold funds, but they can be refunded once the exemption is validated.
A Certified Acceptance Agent (CAA) plays a vital role in helping foreign sellers navigate FIRPTA rules. They can verify identities, review documents, and assist with obtaining an Individual Taxpayer Identification Number (ITIN), which is required for filing and claiming exemptions.
Working with a CAA can prevent delays and errors in your FIRPTA exemption process. They also ensure that all filings comply with current IRS regulations and deadlines.
The FIRPTA Exemption Form (IRS Form 8288-B) must include:
Once filed, the IRS reviews the information and issues a withholding certificate if approved. The buyer can then release any withheld funds back to the seller.
Timely submission is key because IRS processing can take several weeks. Filing too late may result in temporary withholding until the certificate is issued.
While the burden of FIRPTA withholding falls on the buyer, the seller benefits from ensuring exemptions are in place. Buyers must confirm the seller’s foreign status and verify exemption documentation before skipping withholding.
For sellers, a valid exemption helps avoid unnecessary withholding and speeds up access to full sale proceeds. Both parties should work together to ensure the exemption process is properly documented and filed with the IRS.
FIRPTA exemptions depend heavily on timing and proper paperwork. IRS guidelines require that Form 8288-B be submitted before the transfer or within 20 days after closing.
Failure to comply can result in penalties or delayed refunds. Documentation should be accurate and signed by both parties. Keeping copies of the sales contract, buyer’s affidavit, and exemption form is recommended for audit protection.
FIRPTA compliance may seem complex, but with proper guidance, foreign sellers can easily navigate exemption rules and avoid excess withholding. Ensure your documentation is accurate, your exemption request timely, and your filings IRS-approved.
If you are preparing to sell U.S. property, get expert help with the FIRPTA exemption form and ensure your transaction remains fully compliant.
Contact Firpta Tax Returns today to learn how our team can help you claim your FIRPTA exemption efficiently and protect your investment.
Who qualifies for a FIRPTA exemption?
Foreign sellers may qualify for exemption if the buyer intends to use the property as a personal residence, the sale price is $300,000 or less, or the transaction results in no taxable gain. Other exemptions apply to non-recognition transactions like exchanges or gifts. Each case must meet IRS documentation requirements to be valid.
What is the main FIRPTA Exemption Form used?
The primary form is IRS Form 8288-B, which requests a withholding certificate from the IRS. It allows sellers to claim an exemption or reduction from FIRPTA withholding. The form should be filed before or immediately after closing to prevent unnecessary withholding delays.
How long does it take to receive a FIRPTA exemption certificate?
IRS processing times vary, but it usually takes between 60 to 90 days after submission. Incomplete or inaccurate forms may extend this timeline. Working with a Certified Acceptance Agent helps speed up the process by ensuring accurate documentation.
Can buyers claim FIRPTA exemption on behalf of sellers?
Yes, buyers can assist in filing the exemption request, especially when they intend to use the property as their primary residence. However, both buyer and seller must provide proper documentation and agree to the terms stated in the FIRPTA exemption application.
What happens if I don’t apply for a FIRPTA exemption in time?
If no exemption is filed, the buyer must withhold 15% of the sale price and send it to the IRS. The seller can later apply for a refund, but the process takes longer. Submitting the FIRPTA Exemption Form early helps avoid this delay.
Does FIRPTA apply to all real estate sales involving foreign sellers?
Not always. Certain transactions, such as those involving U.S. tax-exempt entities, government organizations, or residential properties under $300,000, may qualify for exemption. Reviewing eligibility before closing ensures proper compliance with FIRPTA rules.
