Strategy Snapshot
FIRPTA withholding is based on gross sales price, not actual gain. The biggest planning opportunity is identifying early whether a withholding certificate can reduce the amount tied up at closing.
A foreign person sells U.S. real estate and the buyer becomes responsible for withholding under FIRPTA.
The seller expects the actual tax to be far lower than 15% of gross proceeds because basis, selling costs, or loss position reduce the gain.
Waiting until closing to address FIRPTA, when there is no time to apply for a withholding certificate or coordinate with escrow.
Foreign sellers of U.S. real estate often discover FIRPTA at the worst possible moment: right before closing, when the buyer or title company says 15% of the gross sales price must be withheld. That withholding is not the final tax. It is a collection mechanism designed to make sure the IRS receives money before the seller leaves the transaction.
The real FIRPTA problem is not usually the tax. It is the cash tied up at closing when withholding is based on gross proceeds instead of actual gain.The planning issue
What FIRPTA Actually Does
FIRPTA, the Foreign Investment in Real Property Tax Act, requires a buyer to withhold part of the purchase price when buying U.S. real estate from a foreign seller. The buyer, not the seller, is the party exposed if withholding is missed. That is why title agents and closing professionals tend to treat the rule seriously even when the seller expects little or no tax liability.
In practice, FIRPTA creates two separate issues:
- The closing-time withholding obligation
- The seller’s later tax return reporting the actual gain or loss
Those are related, but they are not the same calculation.
How the Withholding Works
The standard FIRPTA withholding rate is generally 15% of the gross sales price. There is no reduction at the withholding stage for:
- Basis
- Selling costs
- Depreciation
- Mortgage payoff
- Closing expenses
That is why FIRPTA can over-withhold so dramatically. A seller with a modest gain, or even a tax loss, can still see a large amount withheld at closing because the rule is based on proceeds, not economics.
There are limited exceptions, including certain buyer-use residence situations, but the default rule is broad enough that foreign sellers should assume FIRPTA needs to be reviewed early in the process.
Why the Withholding Often Exceeds the Real Tax
The seller’s actual U.S. tax is computed later on Form 1040-NR. At that stage, the return can reflect:
- Original cost basis
- Improvements
- Selling costs
- Depreciation recapture
- Actual capital gain or loss
That means the final tax can be far lower than the amount withheld. When that happens, the seller claims the withholding as a credit and waits for a refund through the return process.
When a Withholding Certificate Helps
A withholding certificate can reduce or eliminate withholding when the expected tax is lower than the default FIRPTA amount. This is often useful when:
- The property has a high basis
- The gain is relatively small
- Selling costs materially reduce the net result
- The seller is in an overall loss position
- A like-kind exchange or other special fact pattern is involved
The key issue is timing. If the certificate process is not started before or at closing, the withholding may already be locked in.
What Buyers Need to Understand
FIRPTA is not only a seller issue. Buyers can become personally exposed if the withholding obligation is ignored. That is why the residency certification, title-company coordination, and withholding review matter before money moves at closing.
For buyers, the main risk is assuming someone else handled FIRPTA when no one actually did.
When to Get Help
FIRPTA becomes much easier when it is reviewed before the deal is about to close. If you are a foreign seller, a buyer purchasing from a foreign seller, or a closing team trying to understand whether a withholding certificate is worth pursuing, the planning window is early, not late.
Last updated: 2026