You’ve invested in U.S. real estate, perhaps as a home, a rental property, or a pure investment. Now, as you consider selling, you might encounter a term that can cause a bit of a headache: FIRPTA.

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was enacted to ensure that foreign persons pay U.S. income tax on gains from the sale or disposition of U.S. real property interests (USRPIs). Before FIRPTA, foreign investors could often avoid paying capital gains tax on such sales. FIRPTA essentially levels the playing field, requiring non-U.S. persons to pay their share of tax on these gains.

What is FIRPTA Withholding? It’s Not the Tax Itself.

The most critical aspect of FIRPTA for sellers is the withholding requirement. When a foreign person sells U.S. real property, the buyer (or the settlement agent, like a title company or escrow agent) is generally required to withhold 15% of the gross sales price and remit it directly to the IRS.

Important Distinction: This 15% withholding is not the final tax amount you owe. It’s an estimated prepayment of your U.S. tax liability on the sale. The actual capital gains tax you owe will be calculated when you file your U.S. income tax return for the year of the sale. If the withheld amount is more than your actual tax liability, you can claim a refund from the IRS. If it’s less, you’ll owe the difference.

The buyer is the withholding agent, and they can be held liable for the tax if they fail to withhold when required. This is why buyers are diligent in determining the seller’s FIRPTA status.

Who is Considered a “Foreign Person” Under FIRPTA?

This is where the confusion often arises, especially for immigrants. Under FIRPTA, a “foreign person” is generally defined as:

• A non-resident alien individual.
• A foreign corporation.
• A foreign partnership.
• A foreign trust.
• A foreign estate.

Crucial Point: Tax Residency vs. Immigration Residency

Your immigration status (e.g., Green Card holder, H-1B visa holder) does not automatically determine your tax residency.

• Immigration Residency: Governed by immigration laws, determining your right to live and work in the U.S. (e.g., Green Card status, visa validity).
• Tax Residency: Determined by IRS rules, specifically the Green Card Test or the Substantial Presence Test.
  • Green Card Test: If you are a lawful permanent resident (Green Card holder) at any time during the calendar year, you are generally considered a U.S. tax resident for that entire year.
  • Substantial Presence Test: Even without a Green Card, you can be deemed a U.S. tax resident if you are physically present in the U.S. for a sufficient number of days over a three-year period (183 days based on a weighted formula). Many long-term visa holders (like H-1B, L-1, E-2) eventually meet this test.

If you are a U.S. tax resident (by meeting either the Green Card Test or Substantial Presence Test) at the time of the sale, you are generally not considered a “foreign person” under FIRPTA, and thus, the 15% withholding will typically not apply. You will instead report and pay any capital gains tax on your regular U.S. tax return (Form 1040).

This distinction is vital for Green Card holders, as many assume that simply having a Green Card exempts them. While it often does, understanding why you are exempt (due to tax residency) is key. Conversely, a foreign national living outside the U.S. but owning property here will almost certainly be subject to FIRPTA.

FIRPTA Withholding Rates in 2025

The general withholding rate is 15% of the gross sales price. However, there are exceptions and reduced rates:

• 0% Withholding (Full Exemption):
  • If the sales price is $300,000 or less, AND the buyer certifies in writing they intend to use the property as their personal residence (more than 50% of the time for the first two years after sale).
  • If the seller provides a Certification of Non-Foreign Status (declaring under penalties of perjury that they are not a foreign person). This is typically used by U.S. tax residents.
  • If the property is acquired by the U.S. government.
  • If the disposition is of shares in a “domestically controlled” U.S. real property holding corporation.
• 10% Withholding:
  • If the sales price is between $300,001 and $1,000,000, AND the buyer certifies in writing they intend to use the property as their personal residence (as above).
• 15% Withholding:
  • The standard rate for sales over $1,000,000, or when the buyer does not certify personal residency, or for vacant land.

Applying for a FIRPTA Withholding Certificate (Form 8288-B)

What if you’re a “foreign person” under FIRPTA, but you anticipate your actual tax liability on the sale will be significantly less than the 15% withholding (e.g., you’re selling at a loss, or with a very small gain)? You can apply for a Withholding Certificate using IRS Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests.

Benefits of a Withholding Certificate:

• Reduced Withholding: The IRS can authorize the buyer to withhold a lower amount, or even zero, if your estimated tax liability is lower.
• Funds Held in Escrow: If you apply for a withholding certificate before or on the date of closing, the withheld funds (the full 15% initially) are typically held in escrow by the closing agent instead of being immediately remitted to the IRS. This means the money stays accessible to you once the IRS approves the certificate and instructs the release of funds. Without a certificate, the funds are sent to the IRS within 20 days, and you’d have to wait until you file your tax return the following year for a refund.

Key Aspects of the Application Process:

1. Timing is Crucial: File Form 8288-B as early as possible, ideally as soon as you have a signed purchase agreement. The IRS can take 90 days or more to process these applications, so timely submission is essential to keep the funds in escrow.
2. Required Information: You’ll need detailed information about the property, the sale price, the estimated gain or loss, and the identities (including ITINs or SSNs) of both the buyer and seller.
3. Supporting Documentation: Attach relevant documents like the purchase agreement, settlement statements, and a calculation of your estimated U.S. tax liability.
4. Taxpayer Identification Number (TIN): Both the buyer and seller (if a foreign person) must have a U.S. TIN (either an SSN or an ITIN) to complete FIRPTA forms and to receive any refund. If you don’t have one, you’ll need to apply for an ITIN using Form W-7.

Consequences of Non-Compliance

• Buyer Liability: If the buyer fails to withhold when required, they can be held personally liable for the uncollected tax, plus penalties and interest.
• Seller Delays: Without proper planning, foreign sellers might have 15% of their gross sales price tied up with the IRS until they file a U.S. tax return the following year, which can be a significant financial inconvenience.
• Penalties: Both buyers and sellers can face penalties for late filing or failure to comply with FIRPTA regulations.

Partnering with LforLaw for Your Real Estate Sale

Selling U.S. real estate as a non-U.S. person requires a nuanced understanding of both real estate and U.S. tax law. The complexities of FIRPTA, coupled with varying tax residency rules, make professional guidance indispensable.

At LforLaw, our team of experienced attorneys specializes in guiding foreign national clients through U.S. real estate transactions and their associated tax implications. Don’t let FIRPTA become an unexpected headache. Contact LforLaw today for expert legal counsel to ensure a smooth, compliant, and tax-efficient sale of your U.S. real estate in 2025.