FIRPTA
FIRPTA is the United States federal rule requiring tax to be withheld when a foreign seller disposes of U.S. real property.
What you need to know
- Triggered by the seller's status, not the value of the property
- Fifteen percent of the sale price is withheld by default
- The buyer withholds, files and remits, and the buyer carries the liability
- Reduced or zero withholding is available with a certificate obtained before closing
- Form 8288 and payment are due within twenty days of transfer
- We act for both buyers and sellers on compliance
The obligation sits with the buyer
It applies to the buyer, not the seller. The buyer is the party who must withhold, file and remit, and the buyer is the party the IRS pursues if it is not done. In practice that means the risk in a FIRPTA transaction sits with whoever is purchasing, and it is why the analysis needs to be settled before the closing date rather than at it.
Who FIRPTA applies to
Seller statusFIRPTA is triggered by the seller's status, not the property's value or the type of transaction.
It applies where the seller is a foreign person for U.S. tax purposes. That covers non-resident individuals, foreign corporations and partnerships, and certain trusts and estates. It does not depend on where the parties are physically located at closing, or on whether the seller has a U.S. bank account, an ITIN or a Florida address.
It also applies regardless of whether the seller makes a gain. A foreign seller disposing of a property at a loss is still subject to withholding, because the withholding is calculated on the sale price rather than on the profit.
How much is withheld
Three tiersWhich tier applies depends on the sale price and on what the buyer intends to do with the property.
| Amount realized | Buyer's intended use | Rate |
|---|---|---|
| $300,000 or less | Individual buyer, residence, fifty percent use test met | None |
| $300,001 to $1,000,000 | Residence | 10% |
| Any amount | Any other case | 15% |
| Above $1,000,000 | Any use, unless a certificate is approved beforehand | 15% |
Fifteen percent is the default and is calculated on the full amount realized, not on the gain. Nothing is withheld only where the buyer is an individual, the amount realized is $300,000 or less, and the buyer or a member of their family intends to reside at the property for at least half of the days the property is used during each of the first two twelve month periods after closing.
The FIRPTA affidavit
Non-foreign statusWhere the seller is not a foreign person, withholding does not arise at all. The document that establishes this is commonly called a FIRPTA affidavit, or a certification of non-foreign status.
In it the seller certifies under penalty of perjury that they are not a foreign person, and provides their taxpayer identification number. Properly obtained, it relieves the buyer of the withholding obligation.
The affidavit is not a formality. A buyer who accepts one that is defective, or who has reason to know it is false, does not obtain the protection it appears to offer and remains liable for the withholding. Where there is any doubt about the seller's status, the affidavit is the point at which that doubt should be resolved, not overlooked.
The withholding certificate
Form 8288-BThe statutory rate is applied to the gross sale price. The seller's actual tax liability is calculated on the gain. Where the two diverge, and they frequently do, the certificate allows the IRS to authorize withholding at the seller's real liability rather than at the flat percentage. Where a property is sold at a loss, the certificate is the mechanism that recognizes that.
Apply before closing
The application must be made before the closing date. An application made after closing does not suspend the deadline.
Funds are held rather than remitted
Rather than the buyer remitting within twenty days, the withheld amount is held in escrow until the IRS issues its decision.
The IRS decides
Under Rev. Proc. 2000-35 a complete application should be acted upon within ninety days, although processing times vary in practice.
The balance is released
Once the certificate arrives, only the authorized portion is remitted and the balance is released to the seller. Where the certificate eliminates withholding entirely, Forms 8288 and 8288-A are not required at all.
Where the IRS treats a filing as a delaying tactic, interest and penalties run from the twenty first day after transfer.
Form 8288 and the twenty day deadline
FilingWhere withholding applies and no certificate has been obtained, the buyer must file Form 8288 and remit the withheld amount within twenty days of the date of transfer.
Each Form 8288 should report a single disposition.
Where these transactions go wrong
Common errorsTwo errors account for most of the difficulty, and both are avoidable.
Ten percent where fifteen applies
The reduced rate is not available simply because a property is under a million dollars. It requires both the price band and a buyer who intends to occupy the property as a residence under the fifty percent use test.
The safe practice is to default every closing to fifteen percent and reduce only once residence intent and the amount realized are documented.
Assuming $300,000 is exempt
The exemption requires the price ceiling and an individual buyer who intends to occupy.
A corporate buyer does not qualify. A buyer who intends to rent the property does not qualify.
Both errors land on the buyer
Where withholding should have occurred and did not, the buyer is personally liable for the full amount that should have been collected, plus penalties and interest that accrue from the twenty first day.
On a two million dollar property that is three hundred thousand dollars of exposure before any penalty is added.
Where we act
We act for both buyers and sellers on FIRPTA compliance, including status analysis, affidavits and certifications, withholding certificate applications, Form 8288 filing, and the coordination between closing agents, lenders and accountants that these transactions require.
FIRPTA questions rarely arrive early. They tend to surface once a closing date is already fixed, which is precisely when the options narrow. The earlier the seller's status is established, the more of them remain open.
Tell us what you're closing.
Give us the property, the parties, and the date you need to close. We will tell you what the transaction requires and what it will cost.