Understanding FIRPTA: What Every Foreign Property Seller Should Know

Understanding FIRPTA: What Every Foreign Property Seller Should Know

What is FIRPTA?

FIRPTA stands for the Foreign Investment in Real Property Tax Act. It is a U.S. law that requires a portion of the sale price to be withheld whenever a foreign owner sells real estate in the United States. This ensures that non-U.S. owners pay taxes on any gains from the sale.

Who does FIRPTA apply to?

FIRPTA applies to non-U.S. citizens and non-U.S. residents who sell U.S. real estate. It doesn’t matter how long they’ve owned the property—if they are foreign sellers, the law applies. Even owners living outside the U.S. need to follow FIRPTA rules when selling property.

What happens during the sale of a property?

During the sale, the buyer is required to withhold a percentage of the sales price and send it to the IRS. This withholding is not necessarily the final tax owed—it acts as a prepayment until the seller files a proper tax return. This process helps prevent tax evasion by foreign property owners.

How much is usually withheld?

Typically, 15% of the gross sales price is withheld. This is based on the total sale amount, not the actual profit, which is why FIRPTA can be surprising if the seller was expecting to pay only on capital gains.

Can the withholding be reduced or avoided?

Yes. Foreign sellers can apply for a FIRPTA withholding certificate or qualify for exemptions in certain cases. Proper documentation and early planning are crucial.

Why does FIRPTA matter “later”?

Many foreign owners only encounter FIRPTA when they decide to sell. Without understanding it beforehand, sellers may face unexpected withholding, delays at closing, or cash-flow issues. Being aware early ensures smoother transactions.

What are common mistakes sellers make?

• Ignoring FIRPTA until closing: This can delay the transaction or create extra paperwork.

• Assuming withholding equals final tax: Sellers may need to file an IRS return to adjust the actual tax owed.

• Not applying for exemptions: Many small-scale exemptions or certificates are overlooked, causing unnecessary withholding.

How can foreign sellers prepare?

• Consult a tax professional familiar with FIRPTA.

• Understand the withholding requirements before listing the property.

• Keep detailed records of the purchase price, improvements, and other expenses, which may reduce taxable gains.

• Consider the timing of the sale to optimize tax benefits.

Key takeaway

FIRPTA is not something to worry about daily, but it is essential to understand before selling U.S. property as a foreign owner. Knowing how it works, planning early, and seeking professional guidance can prevent surprises and make the sale smoother.