The Foreign Investment in Real Property Tax Act (FIRPTA) generally requires the buyer to withhold 15% of the amount realized when a foreign person sells a United States real property interest, including a home in Manhattan. This withholding obligation comes from Section 1445 of the Internal Revenue Code (IRC). There are exceptions, including a reduced 10% rate for certain residential purchases and a full exemption for homes sold at $300,000 or less.
At Sishodia PLLC, NYC real estate lawyer Natalia Sishodia helps foreign sellers and buyers across New York City handle FIRPTA compliance at closing. Whether you need a withholding certificate, help preparing IRS forms, or guidance on how your tax status affects the transaction, our foreign investment attorneys guide you through each step to make informed, timely decisions.
This guide explains when FIRPTA withholding applies, what exceptions may reduce or eliminate it, and what buyers and sellers should do before closing. Call Sishodia PLLC at (833) 616-4646 to speak with Natalia Sishodia about your transaction.
What Is FIRPTA and How Does It Work?
FIRPTA is a federal tax rule that requires withholding when a foreign person sells a U.S. real property interest. Under IRC Section 1445(a), the buyer is the withholding agent. This means the buyer, not the seller, must hold back a portion of the sale proceeds and send it to the Internal Revenue Service (IRS).
The standard withholding rate is 15% of the amount realized. In many residential sales, the amount realized is the sales price. However, the IRS defines the amount realized more broadly to include cash paid, the fair market value of other property transferred, and certain liabilities assumed by the buyer or attached to the property. For example, if a foreign seller closes on a $1,500,000 condominium in Manhattan and no special adjustments apply, the buyer would typically withhold $225,000 and remit it to the IRS.
Title companies and real estate attorneys often help coordinate this process at closing. However, the legal duty to withhold sits with the buyer. Settlement agents face only limited liability in narrow situations.
What Are the FIRPTA Withholding Rates?
If the buyer fails to withhold and the seller turns out to be a foreign person, the IRS can collect the unpaid amount directly from the buyer. The following table summarizes the standard FIRPTA withholding rates based on the type of transaction:
| Transaction Type | Withholding Rate | Conditions |
|---|---|---|
| Standard sale of U.S. real property by a foreign person | 15% | Default rate under IRC § 1445(a) |
| Buyer will use property as a residence; price above $300,000 but not more than $1,000,000 | 10% | Must plan to occupy property ≥50% of the time for first two years (vacant days not counted) |
| Buyer will use property as residence; price $300,000 or less | 0% | Must plan to occupy property ≥50% of the time for first two years (vacant days not counted) |
| Seller provides valid non-foreign certification | 0% | Buyer must retain certification for 5 years |
| IRS issues withholding certificate | Varies | May be reduced or zero based on seller’s actual tax liability |
Key Takeaway: FIRPTA generally requires withholding when a buyer purchases U.S. real property from a foreign seller, and failing to withhold can result in personal liability for the unpaid tax.
When Is the Seller Considered a Foreign Person Under FIRPTA?
A seller is considered a foreign person for FIRPTA purposes if they fall into one of several categories defined under IRC Section 897. These include a nonresident alien individual, a foreign corporation (unless it has made a valid Section 897(i) election), a foreign partnership, a foreign trust, or a foreign estate.
An individual is generally treated as a U.S. resident for tax purposes if they hold a green card or meet the Substantial Presence Test. This test requires physical presence in the United States on at least 31 days during the current calendar year and 183 weighted days over a three-year period. The calculation counts all days in the current year, one-third of the days in the prior year, and one-sixth of the days in the year before that.
How the Substantial Presence Test Works
The test applies on a calendar-year basis. Someone who spent 120 days in the U.S. each year for three consecutive years would calculate their weighted total as 120 (current year) plus 40 (one-third of 120) plus 20 (one-sixth of 120), for a total of 180 days. That person would not meet the 183-day threshold and could still be treated as a foreign person for FIRPTA purposes.
Certain days do not count toward the test. Days spent in the U.S. as a teacher, student, or professional athlete competing in certain events may be excluded. The IRS also recognizes a “closer connection” exception for individuals who were present fewer than 183 days during the current year and can show stronger ties to a foreign country.
What If the Seller Claims to Be a U.S. Person?
If the seller is not a foreign person, the buyer should obtain a certification of non-foreign status. A buyer who receives a valid non-foreign certification is generally relieved of the withholding obligation. However, the buyer cannot rely on the certification if the buyer has actual knowledge that it is false or receives notice from the seller’s or buyer’s agent that it is false.
Foreign Investment Attorney in Manhattan – Sishodia PLLC
Natalia A. Sishodia, Esq., LL.M.
Natalia Sishodia is the Managing Partner of Sishodia PLLC, a boutique law firm based at 600 Third Avenue, 2nd Floor, New York, NY 10016. Ms. Sishodia’s practice is focused on high-end real estate transactions for both domestic and international clients, including condo and co-op purchases and sales, new development transactions, deed transfers, leasing, lending, and 1031 tax-deferred exchanges. Ms. Sishodia has successfully negotiated and closed transactions in New York and is fluent in English and Russian.
Through her private-client practice, Ms. Sishodia advises on multijurisdictional wealth management, tax and estate planning, and cross-border transaction strategies for individuals, businesses, and trusts. She serves as counsel for high-net-worth individuals, celebrities, businesses, and major mortgage lenders. Her honors include the Award for Outstanding Achievement in International Law and the Avvo Client’s Choice Award. Ms. Sishodia is admitted to practice in New York State.
What Are the Exceptions to FIRPTA Withholding?
FIRPTA withholding is not required in every sale involving a foreign person. Several exceptions under IRC Section 1445(b) may reduce or eliminate the buyer’s obligation. However, notification requirements must still be met.
The $300,000 Personal Residence Exception
If the buyer acquires the property to use as a personal residence and the sales price is $300,000 or less, no withholding is required. The buyer must have genuine 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 after the transfer date. A family member’s occupancy also counts toward this requirement.
The Reduced 10% Rate for Residences Up to $1,000,000
When the buyer plans to use the property as a residence and the sales price is more than $300,000 but not more than $1,000,000, a reduced 10% withholding rate may apply instead of the standard 15%. The same residency-use conditions apply. This reduced rate was established by the Protecting Americans from Tax Hikes (PATH) Act.
Non-Foreign Certification
If the seller provides a certification of non-foreign status under penalties of perjury, the buyer is generally exempt from withholding. The certification must include the seller’s name, U.S. taxpayer identification number (TIN), and home or office address, and it must be dated no more than 30 days before the transfer. The buyer must keep the certification for five years.
IRS Withholding Certificate
The seller, buyer, or either party’s agent may apply to the IRS for a withholding certificate that reduces or eliminates the amount to be withheld.
Key Takeaway: FIRPTA exceptions include the $300,000 personal residence exemption, a reduced 10% rate for residences priced between $300,000 and $1,000,000, non-foreign seller certifications, and IRS-issued withholding certificates. Each exception has specific requirements that must be met.
How Do You File FIRPTA Withholding with the IRS?
After withholding the required amount at closing, the buyer must report and remit the tax to the IRS. This involves two forms: Form 8288, the U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, the Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.
Both forms and the withheld funds must be submitted to the IRS by the 20th day after the date of transfer. Missing this deadline triggers interest on the late payment. The buyer mails the forms along with payment to the IRS address specified in the form instructions.
There is one important exception to this deadline. If the seller (or the buyer) files a properly completed Form 8288-B on or before the date of transfer, the withheld funds are not due until the 20th day after the IRS mails its determination on that application. This gives both parties time to seek a reduced withholding amount without risking penalties for late payment.
Sishodia PLLC can prepare your FIRPTA forms and coordinate the filing timeline with your closing team. Contact us today to discuss your case.
What Is Form 8288-B and How Long Does the IRS Take to Process It?
Form 8288-B is the Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. A seller, buyer, or either party’s agent may file this form to request a reduced or zero withholding amount. The IRS may approve a reduced amount if the tax that would be withheld exceeds the seller’s maximum tax liability on the sale, or if reduced withholding would not risk collection of the tax owed.
The IRS states it will normally act on a complete Form 8288-B application within 90 days of receipt. In practice, processing can take longer. Incomplete applications, missing taxpayer identification numbers (TINs), or documentation errors can cause further delays or outright rejection.
Because the IRS decision on Form 8288-B is based on the completeness and accuracy of the application, filing early is important. A rejection can mean the full 15% withholding applies at closing. For transactions recorded through the Office of the City Register in Manhattan, timing the Form 8288-B filing with the closing schedule requires careful coordination.
Key Takeaway: Form 8288-B allows sellers to request reduced FIRPTA withholding. The IRS targets a 90-day processing window, but delays are common. File early and include all required TINs and documentation to avoid rejection.
What Tax Identification Numbers Do Foreign Sellers Need Before Closing?
Foreign sellers must have valid tax identification numbers before closing on a New York home sale. For individual sellers, this means either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). Entity sellers, such as foreign corporations or trusts, need an Employer Identification Number (EIN).
An expired or missing ITIN can delay or prevent a Form 8288-B application from being processed. ITINs expire if they have not been used on a U.S. federal tax return for three consecutive tax years. Renewal requires filing Form W-7 with the IRS, along with proof of identity.
Steps to secure the right TIN before closing include:
- If you have an SSN: Use it. SSNs do not expire, even if you only worked temporarily in the U.S.
- If your ITIN has expired: File Form W-7 as a renewal. You generally receive the same ITIN number back.
- If you need a new ITIN: Apply by submitting your original passport or a certified copy from the issuing agency. You may also apply through a Certifying Acceptance Agent (CAA) or at an IRS Taxpayer Assistance Center so you do not have to mail originals.
- If you are an entity: Apply for an EIN. This can often be completed by phone and is typically faster than an individual application.
Allow extra time to gather documents and obtain certified copies. International sellers closing on properties recorded through the Automated City Register Information System (ACRIS) should begin the TIN process well before the anticipated closing date.
What Are the Penalties for Not Withholding FIRPTA Tax?
The consequences of failing to withhold under FIRPTA are serious for both the buyer and the seller. If the buyer does not withhold when required, the IRS can hold the buyer personally liable for the full amount that should have been withheld. This liability exists separately from any tax the seller owes.
The IRS can add interest on the late payment starting from the date the withholding was due. Additional penalties may also apply.
Consequences for the Seller
A foreign seller who owes U.S. tax on the gain from the sale must still pay that tax, regardless of whether withholding occurred. False certifications and other compliance failures can also create separate civil or criminal exposure under IRS rules.
What Happens If You Relied on a False Certification?
A buyer who relied on a false non-foreign certification is not automatically protected. If the buyer knew the certification was false, or received notice that the seller was a foreign person, the buyer remains fully liable for the withholding amount. This is why verifying seller status through proper documentation is essential.
Natalia Sishodia of Sishodia PLLC can confirm the seller’s status, prepare the required forms, and coordinate withholding at closing. Call (833) 616-4646 to protect your interests.
How Does a Withholding Certificate Reduce the Amount Withheld?
A withholding certificate issued by the IRS can reduce or eliminate the amount a buyer must withhold at closing. If the seller files the application, the seller must notify the buyer in writing on or before the date of transfer.
The IRS may issue a withholding certificate for several reasons. It may determine that the standard withholding amount exceeds the seller’s maximum tax liability on the gain, or that reducing the withholding would not put the collection of the tax at risk. The seller may also qualify for a full exemption from U.S. tax on the gain, or the buyer or seller may enter into a payment agreement with the IRS.
When a withholding certificate application is pending, the buyer must still withhold the required amount at closing. However, the funds do not need to be remitted to the IRS until the 20th day after the IRS mails its determination. This gives both parties time to receive a potentially favorable ruling before the money is sent.
Key Takeaway: A withholding certificate can reduce or eliminate FIRPTA withholding if the seller’s actual tax liability is lower than the standard amount. The application must be filed early, and the buyer must still withhold at closing while the IRS reviews the request.
What FIRPTA Withholding Rules Apply to New York Real Estate?
FIRPTA is a federal rule, so it applies the same way in every state. However, New York real estate closings involve additional layers that can affect the process. Nonresident individuals, estates, or trusts selling real property must file a state estimated income tax form at or before closing. Generally, Form IT-2663 is used for direct property sales, while Form IT-2664 is used for sales of co-op shares, unless an exemption applies.
The New York State Department of Taxation and Finance reviews these filings. This means a foreign seller may face both federal FIRPTA withholding and state estimated tax obligations.
Real estate closings here are typically handled by attorneys rather than escrow companies. The buyer’s attorney, seller’s attorney, and title company coordinate to make sure the withholding is calculated correctly and the funds are held in escrow until remitted. Deeds and other transfer documents are recorded through the Office of the City Register using the Automated City Register Information System (ACRIS).
Manhattan FIRPTA Filing and Withholding Legal Guidance
Selling a home as a foreign person involves strict withholding rules, tight deadlines, and detailed IRS paperwork. Mistakes can lead to personal liability for the buyer, rejected applications for the seller, or penalties for both parties. Understanding your obligations before closing day is the best way to avoid these problems.
Natalia Sishodia of Sishodia PLLC represents foreign sellers and buyers in real estate transactions throughout Manhattan and the greater New York City area. We handle FIRPTA withholding calculations, Form 8288-B applications, non-foreign certifications, and coordination with title companies. Sishodia PLLC’s foreign investment lawyers also help identify properties available to foreign investors and address ownership challenges. Call Sishodia PLLC at (833) 616-4646 to schedule a consultation.
