AnswerFIRPTA doesn't tax a foreign buyer for buying U.S. real estate. It applies later, when a foreign person sells: the buyer must generally withhold 15% of the amount realized (the total price, not the profit) and send it to the IRS within 20 days of the transfer.

The lower rates both depend on the buyer acquiring the property for use as a residence: no withholding if the price is $300,000 or less, and 10% if it is more than $300,000 but not more than $1 million. If the buyer won't use it as a residence, withholding is 15% at any price. Because luxury homes usually cost far more than $1 million, 15% is the usual rate. The seller can apply for an IRS withholding certificate to reduce the amount. This is general information, not legal or tax advice.

What FIRPTA is

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) lets the U.S. tax foreign persons on dispositions of U.S. real property interests. A "disposition" includes a sale or exchange and, for FIRPTA's purposes, other transfers such as a gift. The buyer (the "transferee") is generally the withholding agent and has to find out whether the seller is a foreign person.

Withholding is not the final tax. It's an advance payment against the seller's actual U.S. tax on the sale. The seller files a U.S. income tax return (for example, Form 1040-NR for an individual) and attaches the IRS-stamped Form 8288-A to claim credit for the amount withheld.

Withholding rates

Situation Withholding Authority
General rule: a foreign person sells a U.S. real property interest, including any sale where the buyer isn't acquiring it as a residence, at any price 15% of the amount realized IRC § 1445(a); IRS FIRPTA page
Buyer is an individual acquiring the property as a residence and the amount realized is $300,000 or less None, if the buyer or a family member has definite plans to live there at least 50% of the days the property is used in each of the first two 12-month periods IRC § 1445(b)(5); IRS exceptions page
Buyer acquires it as a residence and the amount realized is over $300,000 but not over $1,000,000 10% IRC § 1445(c)(4); IRS Publication 515
Amount realized over $1,000,000, residence or not 15% IRS Publication 515

The $300,000 and $1,000,000 thresholds apply to the total amount realized, not each owner's share. The IRS says that if the total is more than $300,000, the $300,000 exemption doesn't apply even when each seller's share is $300,000 or less.

Amount realized is the cash paid or to be paid, plus the fair market value of any other property transferred, plus any liability the buyer assumes or the property is subject to.

Hypothetical illustration, not a real transaction: on a $4,000,000 sale by a foreign seller, 15% of the amount realized is $600,000, whatever the seller's gain. If the seller's actual U.S. tax turns out lower, the seller claims the difference back on the tax return, or applies in advance for a reduced amount.

Who is responsible

The buyer. If a buyer must withhold and doesn't, the IRS can collect the tax from the buyer, plus penalties and interest, so closing agents and buyers' advisers ask for a seller's status in advance. In practice, the escrow or title company often handles the withholding, but the legal duty sits with the buyer (the IRS also notes that agents who know a certification is false can be liable up to their compensation).

When withholding isn't required

The IRS lists several exceptions, each with notice or certification requirements. The ones most relevant to luxury residential sales:

  • The seller certifies, under penalties of perjury, that they aren't a foreign person. The certification includes the seller's name, taxpayer identification number and home address. A valid Form W-9 qualifies.
  • The buyer is an individual buying a residence for $300,000 or less (see the table).
  • The IRS has issued a withholding certificate that excuses withholding.
  • The seller's amount realized is zero, or the transfer qualifies under a nonrecognition rule and the seller gives the required written notice.

Reducing withholding: Form 8288-B

A foreign seller (or the buyer or buyer's agent) can ask the IRS for a withholding certificate on Form 8288-B. The IRS may issue one when:

  • the amount that would be withheld is more than the seller's maximum tax liability on the sale,
  • all gain realized is exempt from U.S. tax, or
  • the seller reaches an agreement with the IRS to pay the tax with security.

Key timing points from the IRS:

  • The IRS generally acts within 90 days after receiving a complete application, including the taxpayer identification numbers of all parties.
  • The seller must notify the buyer in writing that the application was filed, on the day of or the day before the transfer.
  • If the application is pending at closing, the buyer must still withhold the statutory amount, but doesn't have to send it to the IRS until 20 days after the IRS mails the certificate or a denial. If the main purpose of applying was to delay payment, interest and penalties run from the 21st day after transfer.
  • A foreign individual without a taxpayer identification number who is eligible for an ITIN can submit Form W-7 with the Form 8288-B application. The IRS says ITINs can't be requested for FIRPTA before there is a binding contract unless the person has another valid reason.

Because the IRS timeline can be long, sellers who expect to claim a reduction typically apply before the closing date.

Forms at a glance

Form Who files What it does
Form 8288 Buyer (withholding agent) Reports and pays the tax withheld; due by the 20th day after the date of transfer
Form 8288-A Buyer, one per foreign seller Statement of withholding; Copies A and B go with Form 8288, and the IRS stamps Copy B and sends it to the seller
Form 8288-B Foreign seller (or buyer or agent) Application for a withholding certificate
Form W-9 (or other nonforeign-status certification) U.S. seller Certifies the seller isn't a foreign person, so no FIRPTA withholding
Form W-7 Foreign individual needing an ITIN Requests an ITIN; can be filed with Form 8288-B
Form W-8BEN Not a FIRPTA real-property form The Form 8288 instructions use it only for treaty certifications on partnership-interest transfers (§ 1446(f))

The "date of transfer" is generally the first date consideration is paid or a liability is assumed; earnest money and good-faith deposits paid before title passes don't count. Both buyer and seller must provide taxpayer identification numbers on the forms.

Situations that come up in luxury deals

  • Joint owners. If a foreign person and a U.S. person sell together, the amount realized is allocated by capital contribution (spouses are treated as contributing 50% each), and the buyer withholds on the foreign owner's share.
  • Assigning a purchase contract. If a foreign person assigns the right to buy a property to someone else before closing, the IRS says FIRPTA withholding can apply to that assignment.
  • Trusts and entities. Withholding rules differ for corporations, partnerships, trusts and estates, and for sales of interests in entities that hold U.S. real property. Ownership structure should be reviewed with a tax professional before a purchase, not at resale.

What FIRPTA doesn't cover

FIRPTA is one issue. Income tax on the gain, tax on rental income, estate tax for non-U.S. persons and state and local taxes are separate topics. See Haute Real Estate Network's foreign buyers guide and talk to a qualified tax adviser or attorney.

Questions to ask before buying (and before selling)

  1. Who will be the seller's tax adviser, and have they discussed FIRPTA with the closing agent?
  2. Will the seller provide a certification of nonforeign status, or are we planning for 15% to be withheld?
  3. Is a Form 8288-B application worth filing, and when should it go in?
  4. How will the title or escrow company handle Forms 8288 and 8288-A and the 20-day deadline?
  5. How is the property held (individual, trust, entity), and does that change withholding?

Find a luxury real estate agent

Agents are not tax advisers. Use a qualified tax professional or attorney for FIRPTA planning.

Related reading

Sources

This article is general information, not legal or tax advice. Talk to a qualified tax professional or attorney about your situation.