What FIRPTA Means for the Sale
FIRPTA — the Foreign Investment in Real Property Tax Act — requires a buyer to withhold a portion of the purchase price when buying U.S. real estate from a foreign seller. The withholding is not the tax owed. It is a deposit against the seller’s eventual U.S. tax liability, collected at closing because the IRS has no other reliable way to collect from a seller who leaves the country. Getting the withholding right matters for both sides: the buyer faces personal liability if withholding is missed, and the seller can end up with money tied up in withholding that far exceeds the actual tax owed.
How FIRPTA Withholding Works
The standard FIRPTA withholding rate is 15 percent of the gross sales price. There is no deduction for basis, expenses, or selling costs at the withholding stage. This means:
- A seller with a small gain, a large basis, or significant selling costs may have more withheld than the actual tax liability
- The seller files a 1040-NR to report the actual gain, deduct expenses, and apply the withholding as a credit
- Any withholding in excess of the tax owed is refunded through that return
Withholding is reduced in certain situations, including sales of a personal residence under $300,000 to a buyer who intends to use it as a primary residence.
Withholding Certificates
A foreign seller can apply to the IRS for a withholding certificate before or during the sale to reduce or eliminate withholding based on the actual expected tax. This is useful when:
- The gain is small relative to the sales price
- The property has significant basis or deductible selling costs
- The seller is in a loss position
- The property is being sold in a 1031 exchange
The IRS processes withholding certificate applications on an expedited basis for transactions under contract, but the application must be submitted before or at closing. Timing matters. We handle the application and coordinate with escrow to hold the withholding amount while the certificate is pending.
The Seller's Filing Obligation
Whether or not a withholding certificate is obtained, the foreign seller is required to file a U.S. tax return for the year of sale to report the gain and apply the withholding. The return is a Form 1040-NR. The gain is reported on Schedule D and, for real property, is subject to U.S. capital gains rates as effectively connected income.
Depreciation recapture applies at 25 percent on prior depreciation deductions, even if the seller has not claimed depreciation in prior years. This is one of the most common surprises in a foreign seller’s sale-year return.
What the Sale-Year Compliance Stack Looks Like
For a foreign national completing a U.S. real estate sale, the engagement typically covers:
- Basis reconstruction and depreciation recapture analysis
- Withholding certificate application if timing allows
- Coordination with closing agent or escrow on FIRPTA procedures
- Form 1040-NR preparation for the year of sale
- State return preparation where the property is located
- Refund tracking if excess withholding was remitted
Common Mistakes
The most common issues are sellers discovering at closing that 15 percent of the gross price will be withheld with no time to apply for a certificate, buyers missing their FIRPTA withholding obligation and becoming personally liable, sellers not accounting for depreciation recapture in their gain estimate, and missing the state-level filing requirement in the year of sale.
Who This Is For
This page fits foreign nationals selling U.S. real estate, buyers of U.S. real estate from foreign sellers who need help with the withholding obligation, and anyone planning a sale who wants to understand FIRPTA exposure and withholding certificate options before going under contract.