What are the FIRPTA withholding obligations for foreign investors selling U.S. real estate?

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The withheld amount is remitted to the IRS as a prepayment of the foreign seller’s potential U.S. tax liability on the transaction. FIRPTA applies to direct sales of real estate, as well as certain interests in U.S. corporations, partnerships, trusts, and estates that hold significant U.S. real property assets.

What must be withheld?

The buyer, not the foreign seller, is normally the withholding agent. The standard FIRPTA withholding rate is 15% of the amount realized, which generally includes cash, the fair market value of other property transferred, and liabilities assumed by the buyer. It is based on gross proceeds, not the seller’s taxable gain.

For a property acquired by an individual buyer as a residence, the rate is generally 10% when the amount realized exceeds $300,000 but does not exceed $1 million. No withholding is generally required when the amount realized is $300,000 or less and the buyer satisfies the residence-use requirement. Other FIRPTA withholding exemptions may apply, including certain nonrecognition transactions, qualifying certifications that the seller is not foreign, and transactions covered by an IRS determination.

Seller obligations before and after closing

1. Confirm whether FIRPTA applies. The rules can cover direct ownership of land or buildings and certain indirect interests in corporations, partnerships, trusts, estates, and real estate investment entities.
2. Obtain a U.S. taxpayer identification number. The seller’s TIN must be included on withholding forms and is important for matching the payment to the seller and obtaining credit or a refund.
3. Coordinate with the buyer and closing agent. The buyer generally files Form 8288 and Form 8288-A and remits the withheld amount by the twentieth day after the disposition.
4. Consider requesting a FIRPTA Withholding Certificate. Form 8288-B may request reduced or zero withholding when the statutory amount exceeds the seller’s expected maximum tax liability or another qualifying basis applies. The application should be filed before or on the closing date, supported by basis, contract, expense, and estimated-tax information. The seller must notify the buyer in writing that an application was submitted no later than the day of transfer. The IRS aims to act within 90 days after receiving a complete application containing all required information.
5. File a U.S. income tax return. Withholding is a prepayment, not the final tax. The seller reports the gain, calculates the actual liability, and claims credit using the stamped Form 8288-A or acceptable evidence of withholding. Sellers should preserve settlement statements, improvement records, depreciation schedules, and professional fees needed to substantiate basis and calculate gain.

Common problems that disrupt the transaction

Frequent errors include calculating withholding on amount realized rather than taxable gain, starting the TIN process too late, assuming an entity sale falls outside FIRPTA, overlooking state withholding, and failing to confirm how escrow will handle funds while Form 8288-B is pending. A pending application generally does not eliminate the requirement to retain funds at closing.

Coordinated planning

As the IRS increases transfer pricing enforcement, businesses should maintain contemporaneous documentation and consistently apply transfer pricing policies to support their tax positions. Coordinating Transfer Pricing compliance with broader cross-border tax planning can help reduce audit risk and improve IRS exam readiness.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Matt Pellegrom, partner in charge of Bennett Thrasher’s International Tax practice, or call us at 770.396.2200.

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