What is FIRPTA (Foreign Investment in Real Property Tax Act)?

How it works

FIRPTA — the Foreign Investment in Real Property Tax Act of 1980 — closed a loophole that previously let non-residents sell US real estate and walk away tax-free because the gain wasn't FDAP and wasn't necessarily ECI. The statute does two things:

1. Treats every gain on a US real property interest (USRPI) by a non-US person as ECI — fully taxable at graduated rates on Form 1040-NR (individuals) or Form 1120-F (foreign corporations).
2. Requires the buyer to withhold tax at closing as a collection mechanism — the seller doesn't pocket cash and disappear before the IRS can assess.

The buyer / closing agent withholds 15% of gross sale price (not net gain) by default. They remit it to the IRS within 20 days via Form 8288 and provide the seller with Form 8288-A (the seller's record of withholding).

The withholding rate ladder

The under-$300k personal-use exemption is heavily used. The buyer signs an affidavit that they intend to occupy the property at least 50% of the time over the next two years; FIRPTA withholding is waived. The seller still owes US tax on the gain — they just don't have it withheld at closing.

Reduced withholding via Form 8288-B

If the actual tax liability on the gain is meaningfully less than the default 15% of gross (very common — gross price ≠ gain), the seller can file Form 8288-B with the IRS before closing requesting a withholding certificate at the actual estimated tax amount. The IRS typically responds within 90 days; a successful 8288-B can reduce the withholding from 15% of gross to the seller's real tax exposure. Worth doing on any sale where the cost basis is high relative to sale price.

What counts as a USRPI

• Direct ownership of US real estate (residential, commercial, agricultural, vacant land).
• Shares in a US real property holding corporation (USRPHC) — a US corp where 50%+ of its assets, by value, are US real estate.
• Partnership interest if the partnership is engaged in US real estate.
• REIT shares are often exempt from FIRPTA at the individual level under specific carve-outs (qualified shareholder exemption, regulated investment company rules).

Examples

• Brazilian investor sells $800,000 Miami condo with $500,000 basis. Buyer withholds 15% × $800,000 = $120,000 at closing under FIRPTA. The investor files Form 1040-NR the following spring, computes long-term capital-gains tax on the $300,000 gain (around $45-60k at federal rates), and claims a refund of approximately $60-75k. Refund issued 9 months later.
• British family sells $280,000 Phoenix vacation home to a US family who'll occupy it. Buyer signs the personal-use affidavit (under $300k + intends to occupy) → 0% FIRPTA withholding. The British family still files Form 1040-NR to report the gain and pay tax — but no cash is held back at closing.

Common mistakes

• Assuming under $300k = no US tax. The exemption only applies to withholding at closing. Tax on the gain itself is still owed via Form 1040-NR.
• Skipping Form 8288-B and over-withholding. On high-basis property sales, 15% of gross is often 2-3x the actual tax. Always evaluate Form 8288-B pre-closing on commercial / appreciated residential sales.
• Forgetting state tax on the gain. California, New York and others tax non-residents on gains from in-state real estate. FIRPTA is federal; state has its own withholding regimes (CA has a 3.33% real estate withholding parallel to FIRPTA).
• Treating REIT investments as full FIRPTA exposure. Specific REIT carve-outs exist for qualified foreign pension funds and small individual holders. Worth a check before assuming 15% applies to a REIT exit.