What is FIRPTA?

Definition

The Foreign Investment in Real Property Tax Act (FIRPTA), enacted in 1980 under IRC Section 897, imposes US income tax on foreign persons (nonresident aliens and foreign corporations) who dispose of a US real property interest (USRPI). The most significant practical impact of FIRPTA is the mandatory withholding requirement: when a foreign person sells US real estate, the buyer (or the buyer's agent) must withhold 15% of the gross sales price and remit it to the IRS within 20 days of closing on Forms 8288 and 8288-A. Who Is Affected: Any nonresident alien individual or foreign corporation that sells, exchanges, or otherwise disposes of a US real property interest is subject to FIRPTA. For US-Canada cross-border purposes, the most common scenario is a Canadian resident (who is not a US citizen or green card holder) selling a US vacation home, rental property, or investment property. Canadians who own condos in Florida, Arizona, or other snowbird destinations are the largest group of foreign sellers affected by FIRPTA. The 15% Withholding Rate: The standard FIRPTA withholding rate is 15% of the gross sales price — not 15% of the gain. This is critical because the withholding is calculated on the entire sale price, even if the actual capital gain is much smaller. For a $500,000 property sale, $75,000 is withheld regardless of whether the actual gain is $50,000 or $200,000. This creates a significant cash flow issue for sellers who must then wait for a tax refund. Exceptions to the 15% Rate: Several exceptions reduce or eliminate FIRPTA withholding. If the buyer intends to use the property as a personal residence AND the sales price is $300,000 or less, the withholding rate is 0%. If the sales price is between $300,001 and $1,000,000 and the buyer will use it as a residence, the rate is reduced to 10%. The seller can also apply for a withholding certificate (Form 8288-B) before closing to reduce withholding to the expected actual tax liability — this is highly recommended for sales where the actual gain is significantly less than 15% of the sales price. However, the IRS typically takes 90 days to process withholding certificate applications, so early planning is essential. Forms 8288 and 8288-A: The buyer (transferee) files Form 8288 (US Withholding Tax Return for Certain Dispositions by Foreign Persons) to report and remit the withheld amount to the IRS within 20 days of the transfer date. Form 8288-A (Statement of Withholding on Dispositions by Foreign Persons of US Real Property Interests) is filed with Form 8288 and provides the details of the transaction. A copy of Form 8288-A is sent to the foreign seller, who needs it to claim credit for the withholding on their US tax return. Claiming a Refund: The foreign seller files a US income tax return (Form 1040-NR for individuals) for the year of the sale, reporting the actual capital gain and tax liability. If the FIRPTA withholding exceeds the actual tax owed, the excess is refunded. For example, if $75,000 was withheld on a sale but the actual capital gains tax is $30,000, the seller receives a $45,000 refund. However, this refund process can take 6-12 months, tying up the seller's capital. Canada-Specific Considerations: Canadians selling US real estate face taxation in both countries. The US taxes the gain under FIRPTA, and Canada taxes the gain because Canadian residents are taxed on worldwide income (including foreign real estate gains). The US-Canada Tax Treaty helps prevent full double taxation — the Canadian seller can claim a Foreign Tax Credit on their Canadian return for US taxes paid on the gain. However, timing differences between the US and Canadian tax years and different rules for calculating the gain (the US uses USD cost basis while Canada uses CAD) can create complications. Buyer's Obligations: The buyer bears significant liability under FIRPTA. If the buyer fails to withhold the required amount, the buyer becomes personally liable for the tax, plus interest and penalties. Real estate agents and closing attorneys should always inquire about the seller's citizenship/residency status and arrange for FIRPTA withholding when applicable. A seller's certification of non-foreign status (typically using a FIRPTA affidavit) relieves the buyer of withholding obligations when the seller is a US person. Beyond Direct Real Estate: FIRPTA also applies to dispositions of interests in US real property holding corporations (USRPHCs), certain partnership interests where the partnership holds USRPIs, and distributions by REITs to foreign shareholders that are attributable to gains from real property sales. This broader scope means Canadians with US real estate investments through entities may also face FIRPTA withholding.

Related Forms

Common Mistakes to Avoid

• 1Not applying for a withholding certificate (Form 8288-B) before closing to reduce the 15% withholding when the actual gain is much smaller — this can free up tens of thousands in cash at closing
• 2Buyers not withholding 15% on purchases from foreign sellers, leaving the buyer personally liable for the full withholding amount plus penalties
• 3Canadian sellers not filing a US return (Form 1040-NR) after the sale to claim a refund of excess FIRPTA withholding — the IRS will not refund automatically

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