FIRPTA is a federal tax rule found in Section 1445 of the Internal Revenue Code. It lets the United States collect tax when a foreign person sells a U.S. real property interest. In plain terms, the law treats part of the sale proceeds as a prepayment of potential tax.
If you are buying from a foreign seller, you are usually the one who must hold back money for the IRS. The general rule is to withhold 15% of the amount realized, which most deals treat as the gross sales price. Title companies and attorneys often help track this, but the duty sits with the buyer.
There is paperwork and a quick deadline. The buyer sends Forms 8288 and 8288-A to the IRS along with the withheld funds. The package is due by the 20th day after the date of transfer. Sometimes sellers apply for a reduced or zero withholding amount using Form 8288-B. If a properly completed Form 8288-B is filed on or before the transfer, the money is not due until the 20th day after the IRS mails its decision on that application.
Every deal has moving parts. Your timeline, your status, and your documents matter. Talk with a New York foreign investment lawyer so you can line up the right withholding, forms, and deadlines for your closing.
At Sishodia PLLC, our skilled foreign investment lawyers can clarify whether FIRPTA withholding is applicable to your transaction and help with compliance to avoid any unnecessary costs. We can also assist in identifying properties that are available to foreign investors and addressing any challenges that might arise due to foreign ownership. Contact us today at (833) 616-4646 to schedule a consultation.
What is FIRPTA?
FIRPTA (Foreign Investment in Real Property Tax Act) is a federal rule that kicks in when a foreign person sells a U.S. real estate interest. It requires withholding based on the amount realized, which usually means the gross sales price, not the seller’s profit. The standard rate is 15%.
If you are buying from a foreign seller, you are the withholding agent. That means you must hold back the tax at closing and send it to the IRS. Settlement and escrow companies help with the forms and logistics. They are not the withholding agent, and they face only limited liability in certain narrow situations.
There is one common exception to the 15% rate. If you are buying the property to use as a residence and the price is more than 300,000 but not more than 1,000,000, a 10% rate can apply. You or a family member must have definite plans to live in the home.
Two parts of the tax code matter here. Section 1445(a) is the rule that applies when you buy from a foreign seller. Section 1445(e) is different. It requires certain corporations, qualified investment entities, trusts, estates, and in limited cases partnerships to withhold when they make specific distributions of U.S. real property interests to foreign persons. A routine sale of real estate by a U.S. corporation or partnership does not, by itself, create a buyer withholding duty under section 1445(a).
If your seller is a foreign person, you are generally required to withhold taxes from the sale. If the property will be your home and the price falls in the 300,000 to 1,000,000 range, you may qualify for the reduced 10% rate. When in doubt, loop in your closing team early so the right paperwork is ready at the table.
When the Seller is Considered a Foreign Person
FIRPTA regulations apply to the seller, but if you are the buyer, you must find out if the transferor is a foreign person. If they are a foreign person and you fail to withhold, you may be held liable for the tax.
For FIRPTA, a foreign person includes a nonresident alien individual, a foreign corporation (unless it has a valid section 897(i) election), a foreign partnership, a foreign trust, or a foreign estate. An individual is generally a U.S. resident for tax purposes if they hold a green card or meet the substantial presence test (31 days in the current year and 183 weighted days over the current and two prior years).
The Substantial Presence Test allows a person to be considered a United States resident for tax purposes if they meet the test for the calendar year. To meet the requirements of this test, a person must be physically present in the United States on at least:
- 31 days during the current year
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
a. All the days present in the current year, and
b. One-third of the days present in the first year before the current year, and
c. One-sixth of the days present in the second year before the current year.
If the seller is not a foreign person, the buyer should obtain and retain (not file) a certification of non-foreign status (for example, a signed Form W-9 or a certification with the seller’s name, address, and TIN). Keep this certification in your records for five years after the year of transfer. In that case, FIRPTA withholding is not required.
Preparing Tax IDs Before NY Home Sale Closing
When closing on a home sale in New York, foreign sellers must ensure they have the necessary tax identification numbers (TINs) well in advance. For individuals, this could be a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). Entities require an Employer Identification Number (EIN). It’s crucial to note that if you are a foreign seller who has not kept up with FIRPTA requirements or let your ITIN expire, you could face delays or denials in your withholding certificate application.
Here’s what you need to know:
- SSN Use: If you already have an SSN, use it. SSNs don’t expire, even if you temporarily worked in the U.S.
- ITIN Renewal: If your ITIN hasn’t been used on a U.S. federal tax return for three consecutive tax years, it expires. You generally renew the same ITIN (you don’t get a new number) by filing Form W-7 as a renewal.
- New ITIN or EIN: If you’ve never had an ITIN or SSN, you must apply for one. To apply, you may submit your original passport or a certified copy issued by the passport-issuing agency, or apply through a Certifying Acceptance Agent (CAA) or at an IRS Taxpayer Assistance Center that can verify your identity and documents so you don’t have to mail originals. For entities, obtaining an EIN is typically quicker and can be completed via phone.
Allow ample time to gather documents and secure certified copies of passports, if necessary. Non-compliance with FIRPTA or failure to provide the IRS with the required evidence of your tax status can lead to a rejected 8288-B application, and this decision by the IRS is final. Be proactive to ensure a smooth sales process.
New York Foreign Investment Lawyer – Sishodia PLLC
Natalia A. Sishodia, Esq., LL.M.
A trusted New York foreign investment lawyer, Natalia Sishodia focuses on high-end real estate transactions for domestic and international clients. Fluent in English and Russian, she regularly guides overseas buyers and U.S. sellers through condo and co-op deals, new development purchases, deed transfers, leasing and lending matters, and 1031 tax-deferred exchanges. Known for meticulous planning and clear communication, she has successfully negotiated and closed hundreds of New York transactions, earning a reputation for “stress-free” closings for high-net-worth individuals, celebrities, businesses, and major mortgage lenders.
Through her private-client practice, Ms. Sishodia helps clients build, preserve, and transfer wealth with multi-jurisdictional tax and estate planning strategies, including sophisticated cross-border structures for individuals, businesses, and trusts. She is also among the few New York attorneys experienced in estate planning for digital assets and cryptocurrency. Committed to service, Ms. Sishodia has contributed pro bono work and policy insight at the United Nations and supports community legal education. Her honors include the Award for Outstanding Achievement in International Law and the Avvo Client’s Choice Award.
Exceptions to FIRPTA Withholding
Usually, the transferee/buyer is the withholding agent. However, FIRPTA withholding may not be required under the following circumstances, but notification requirements must be met:
- The transferee acquires the property for use as a residence, and the sales price is not more than $300,000. The transferee must have plans to reside at the property for at least 50% of the time it is in use during each of the first two 12-month periods following the date of transfer.
- The transferor gives you a certification stating that the transferor is not a foreign person and contains the transferor’s name, U.S. taxpayer identification number, and home address. The transferor can also give the certification to a qualified substitute.
- You receive a withholding certificate from the Internal Revenue Service that excuses withholding.
Additional exemptions may be relevant. The rules for FIRPTA withholding are extensive, and because of the risks to buyers, the tax should be held back if there’s any uncertainty. You should consult a CPA or a licensed attorney for additional information.
| Situation | Withholding Rate | Conditions / Notes |
|---|---|---|
| Standard rule (foreign seller, any U.S. real property) | 15% of gross sales price | Applies to most transactions unless an exception applies. Buyer is the withholding agent. |
| Residential property exception | 10% of gross sales price | Applies if property price is 300,000 – 1,000,000 and buyer or family has definite plans to live in it. |
| Exemption (residence under 300,000) | 0% (no withholding) | If the sales price is 300,000 or less and the buyer will use it as a residence. |
| Non-individual entities (corporations, trusts, estates, QIEs, certain partnerships) | Usually 15% | Governed by Section 1445(e). Withholding applies when these entities distribute U.S. real property interests to foreign persons. |
What Are the Penalties for Not Withholding FIRPTA?
FIRPTA is a serious legal obligation with significant consequences. If you are the buyer and you do not withhold when required, the IRS can hold you personally liable for the unpaid amount. That liability is separate from the seller’s bill. The government can add interest on the late payment and assess penalties. If you’re required to withhold but don’t, the IRS can collect the tax that should have been withheld (plus interest) from you, and additional penalties may apply, including up to a $10,000 penalty for willful failure to collect and pay over the tax; responsible-person penalties can also apply.
Sellers are not off the hook. A foreign seller who owes U.S. tax on the gain still has to pay it, plus interest and accuracy penalties if the numbers are wrong. Filing late or not filing can trigger additional charges. Knowingly avoiding FIRPTA can be treated as tax evasion, which may bring criminal exposure. That is a situation you do not want to be in.
For buyers, the timeline is tight. Form 8288 and payment are generally due within 20 days after the transfer. Miss that, and interest starts running. If you relied on a wrong certification or skipped the withholding certificate process, you can still be pursued for the full amount.
A New York real estate attorney can help you get this right. Your lawyer can confirm the seller’s status, review affidavits, request a withholding certificate, prepare Forms 8288 and 8288-A, and coordinate with the title company so funds move correctly at closing. You can get clear steps, deadlines, and less risk. When FIRPTA applies, withhold first and avoid the fallout now.
Seller Withholding Certification
The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted following a withholding certificate issued to the IRS. The transferee, the transferee’s agent, or the transferor may request a withholding certificate. A transferor must notify the transferee in writing that the certificate has been applied for on the day or the day prior to the transfer.
If a Withholding Certificate was applied for, required funds must be submitted within 20 days of the Withholding Certificate notice. A withholding certificate may be issued due to:
- A determination by the IRS that reduced withholding is appropriate due to:
a. The amount that would be withheld is more than the transferor’s maximum tax liability, or
b. Withholding of the reduced amount would not jeopardize the collection of the tax. - The exemption from U.S. tax of all gains realized by the transferor, or
- An agreement for the payment of tax entered into by the transferee or transferor.
Form 8288-B Processing Time
When dealing with transactions involving U.S. real property interests by foreign persons, Form 8288-B plays a crucial role. This form, officially known as the Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, is necessary for those seeking an exemption or a reduction in tax withholding.
The IRS states it will normally act within 90 days of receiving a complete Form 8288-B application; in practice, processing can take longer. File early and include all parties’ TINs and required documentation to avoid delays. Delays can occur, and given the importance of timely compliance with tax obligations, it is advised to file this form at the earliest opportunity. Timely submission not only facilitates smoother processing but also minimizes the risk of facing unnecessary withholdings on the transaction.
Submitting an accurate and complete Form 8288-B is essential. Any errors or omissions in the application can lead to its rejection, causing further delays and complications. Timely and accurate filing can allow the IRS to review and process the application without unnecessary delays, facilitating a more efficient transaction process. A New York foreign investment lawyer can provide professional guidance and support to clarify your obligations, avoid potential pitfalls, and manage FIRPTA withholding effectively.
This article is not legal or tax advice. If you are in need of legal or tax advice, our experienced New York foreign investment attorneys at Sishodia PLLC may be able to help. Call us at (833) 616-4646 or leave your contact details on our online form today to schedule a consultation and learn more about how we can help handle the legal aspects of your transaction.
