FIRPTA, the Foreign Investment in Real Property Tax Act, requires foreign sellers of U.S. real estate to pay a withholding tax generally of 15% of the sale price when they dispose of a U.S. real property interest, unless an exception or reduced withholding rule applies. The buyer is responsible for withholding the tax and remitting it to the IRS. FIRPTA applies to both residential and commercial property transactions throughout Manhattan and the rest of the United States, with withholding rates that vary based on the sale price and the property’s intended use.
At Sishodia PLLC, our experienced New York real estate attorneys assist both foreign sellers and buyers with FIRPTA compliance. New York Foreign Investment Lawyer Natalia A. Sishodia, Esq., LL.M. has worked with international clients from around the world on real estate transactions in Manhattan and throughout the greater metropolitan area.
This guide explains what FIRPTA is and why it was enacted, who qualifies as a foreign person under the statute, what withholding rates apply, how buyers and sellers meet their obligations, and what exemptions exist. If you have any questions about FIRPTA and foreign real estate investment matters, contact us at (833) 616-4646 to schedule a consultation.
What Does FIRPTA Stand For and Why Does It Exist?
FIRPTA stands for the Foreign Investment in Real Property Tax Act. Before FIRPTA was enacted in 1980, foreign sellers could avoid paying U.S. taxes for capital gains upon the sale of U.S. real properties. This was viewed as a competitive advantage to foreign investors who owned property here.
Congress addressed that issue by treating gain or loss from a foreign person’s disposition of a U.S. real property interest as income connected with a U.S. trade or business, while IRC § 1445 generally requires withholding on the amount realized. Under IRC § 897, gain or loss from a foreign person’s disposition of a U.S. real property interest is generally treated as effectively connected with a U.S. trade or business. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.
FIRPTA requires foreign sellers of U.S. real estate to pay a withholding tax of up to 15% of the sale price. The buyer is responsible for withholding and remitting the tax to the IRS to ensure compliance with U.S. tax law. The foreign seller’s actual tax liability is determined when they file a U.S. income tax return, and if the amount withheld exceeds the tax owed, they may claim a refund.
Key Takeaway: FIRPTA was enacted in 1980 to close a tax gap that allowed foreign investors to sell U.S. real property without paying capital gains taxes. Under IRC § 897, all dispositions of U.S. real property interests by foreign persons are now treated as taxable income.
Who Is a “Foreign Person” Under FIRPTA?
Under IRC § 1445, a “foreign person” includes any individual, corporation, partnership, trust, or estate that is not classified as a U.S. person. Specifically, the term covers:
- Nonresident alien individuals who do not meet the substantial presence test or hold a green card
- Foreign corporations organized under the laws of a country other than the United States
- Foreign partnerships, meaning partnerships that are not U.S. persons
- Foreign trusts and foreign estates as defined under IRC § 7701
The distinction between U.S. citizenship and tax residency matters. A foreign national who holds a green card or meets the IRS substantial presence test is treated as a U.S. tax resident and is generally not subject to FIRPTA withholding. Conversely, a U.S. citizen living abroad is not a foreign person under FIRPTA.
Does FIRPTA Apply to Foreign-Owned LLCs or Corporations?
FIRPTA applies differently depending on how an entity is structured. A single-member LLC owned by a foreign person is treated as a disregarded entity for tax purposes, meaning the foreign owner is personally subject to FIRPTA withholding.
A multi-member LLC taxed as a partnership requires a fact-specific analysis. If the LLC or partnership is the seller, the buyer must determine whether the transferor is a foreign entity. If a domestic partnership has foreign partners, separate partnership withholding rules may also apply
A foreign corporation that sells U.S. real property is subject to FIRPTA under IRC § 897(a). A domestic corporation that qualifies as a U.S. Real Property Holding Corporation (USRPHC) may also trigger FIRPTA obligations when foreign shareholders dispose of their interests. A corporation is a USRPHC if the fair market value of its U.S. real property interests is at least 50% of the sum of the fair market value of its U.S. real property interests, foreign real property interests, and other assets used or held for use in a trade or business.
Key Takeaway: FIRPTA applies to any “foreign person,” including nonresident aliens, foreign corporations, foreign partnerships, and foreign trusts. Entity structure matters because LLCs, partnerships, and corporations are each treated differently under the withholding rules.
What Transactions Trigger FIRPTA Withholding?
FIRPTA withholding is triggered whenever a foreign person disposes of a U.S. real property interest (USRPI). The term “disposition” is broader than a standard sale. Under IRC § 897, the following types of transactions can trigger FIRPTA withholding:
- Standard sales of residential or commercial real estate
- Installment sales where the purchase price is paid over time
- Foreclosures and transfers in lieu of foreclosure
- Exchanges, including partial exchanges of real property
- Transfers to trusts or distributions from trusts involving U.S. real property
- Gifts of real property where the transferee assumes liabilities
- Distributions by corporations or partnerships of U.S. real property interests to foreign shareholders or partners
A U.S. Real Property Interest includes direct ownership of land and buildings, as well as interests in domestic corporations that qualify as U.S. Real Property Holding Corporations. It also includes interests in mines, wells, and other natural deposits within the United States.
In Manhattan, where foreign investors frequently hold residential and commercial real estate, most standard property sales between a foreign seller and any buyer will trigger FIRPTA withholding obligations. To discuss whether your transaction triggers FIRPTA, contact Natalia A. Sishodia, Esq., LL.M. at (833) 616-4646.
Key Takeaway: FIRPTA is not limited to standard real estate sales. Foreclosures, installment sales, exchanges, and certain transfers to trusts or entities can all trigger withholding obligations under IRC § 897.
What Are the FIRPTA Withholding Rates?
There are different withholding rates based on the sales price of the property. Under IRC § 1445, the applicable rate depends on both the sale price and whether the buyer intends to use the property as a personal residence.
If the sales price of the property is less than $300,000, FIRPTA may not be applicable. In this case, the buyer must certify that the property will be used as a residence for more than 50% of the first two years after the sale.
If the amount realized is more than $300,000 but not more than $1 million, withholding is reduced to 10% only when the buyer acquires the property for use as a residence. Otherwise, the general 15% rate applies unless another exception or withholding certificate applies.
If the sales price of the property is over $1 million, FIRPTA withholding must be made at a rate of 15% of the amount realized.
The standard withholding rate is 15% of the sale price, though certain conditions may reduce this amount. The foreign seller’s actual tax liability is determined when they file a U.S. income tax return, and if the amount withheld exceeds the tax owed, they may claim a refund.
| Sale Price | Withholding Rate | Condition |
|---|---|---|
| Under $300,000 | 0% | Buyer or a family member plans to use the property as a residence for at least 50% of the days used during each of the first two 12-month periods after transfer, excluding vacant days. |
| More than $300,000 – $1,000,000 | 10% | Buyer intends to use the property as a personal residence. |
| Over $1,000,000 | 15% | All qualifying transactions, regardless of the buyer’s intended use. |
In Manhattan, where property prices regularly exceed $1 million, the 15% withholding rate applies to the majority of transactions involving foreign sellers.
Key Takeaway: FIRPTA withholding can be as high as 15% in many Manhattan transactions involving foreign sellers, especially when the sale price exceeds $1 million or the deal does not qualify for a reduced rate.
What Are the Responsibilities of Buyers Under FIRPTA?
To ensure that this tax is collected, a buyer purchasing a property from a foreign individual is required to withhold a percentage of the purchase price of the property. This will be held by the IRS to offset any taxes owed on the sale. The seller will receive a refund if taxes are calculated as less than the amount withheld.
Within twenty days after the date of transfer, the buyer of the property is required to file Form 8288 with the Internal Revenue Service, with the amount withheld from the seller. The buyer must also submit Form 8288-A along with Form 8288, which the IRS will stamp and return to the seller as proof of the amount withheld. The seller needs this form to file their U.S. income tax return and claim any refund owed.
In practice, the closing attorney or title company typically handles the withholding and remittance process. However, under the law, the buyer is the designated “withholding agent” and bears ultimate responsibility for compliance. Buyers should confirm that proper withholding arrangements are in place before closing, particularly in Manhattan transactions where large sums are involved.
What Happens If a Buyer Fails to Withhold Under FIRPTA?
If a buyer fails to withhold the required FIRPTA tax, the buyer becomes personally liable for the unpaid withholding amount. Under IRC § 1445, the IRS can assess the full withholding amount against the buyer, plus interest and penalties. Buyers should request proper non-foreign certification when applicable.
The IRS may collect the unwithheld tax, plus interest, from the withholding agent. Penalties may also apply, including penalties for failure to file or pay, a penalty of up to $10,000 for willful failure to collect and pay over the tax, and, for responsible persons, a penalty equal to the amount that should have been withheld and paid over.
Key Takeaway: The buyer is the designated withholding agent under FIRPTA and must file Form 8288 within 20 days of closing. If a buyer fails to withhold, they become personally liable for the full unpaid tax plus interest and penalties.
New York Foreign Investment Lawyer — Natalia A. Sishodia, Esq., LL.M.
Natalia A. Sishodia, Esq., LL.M.
Natalia A. Sishodia, Esq., LL.M. is a New York attorney and Managing Partner whose practice includes real estate law, business law, elder law, estate planning, and taxation. Ms. Sishodia is fluent in English and Russian and has worked with domestic and international clients on legal matters involving New York City, including clients from Europe, Asia, the Middle East, and North America. Her background includes work at the United Nations Headquarters with the Department of Economic and Social Affairs and the Convention on the Rights of Persons with Disabilities, where she gained experience serving a diverse international audience.
Ms. Sishodia has handled hundreds of real estate transactions in New York, including condominium and co-op purchases and sales, residential and multifamily property transactions, deed transfers, leasing, lending matters, and 1031 tax-deferred exchanges. Her private client work includes multijurisdictional wealth management, tax and estate planning, cross-border tax strategies, and planning involving digital assets and cryptocurrency. She has received the Award for Outstanding Achievement in International Law and the Avvo Client’s Choice Award, and she is admitted to practice in New York State.
What Are the Exemptions and Exceptions to FIRPTA?
There are instances where the amount withheld can be reduced or eliminated altogether. If you are a foreign person selling U.S. real property or a buyer who is purchasing from a foreign seller, you should understand your obligations and options as they apply to FIRPTA.
The major exemptions under IRC § 1445 include:
- Personal-use residence exemption: If the sale price is under $300,000 and the buyer certifies that the property will be used as a personal residence for more than 50% of the first two years after closing, withholding is not required.
- Non-foreign seller certification: If the seller provides a sworn affidavit certifying they are not a foreign person, including their U.S. taxpayer identification number, the buyer is relieved of the withholding obligation. This is one of the most common ways FIRPTA withholding is avoided in practice.
- Domestically controlled REIT and RIC interests: Certain interests in qualified investment entities, REITs, RICs, publicly traded entities, or domestically controlled entities may be exempt, but the rules are technical and ownership thresholds matter.
- Publicly traded stock: Certain publicly traded corporations, partnerships, trusts, REITs, or RIC interests may be exempt, but ownership limits and entity type matter.
- Withholding certificate: A foreign seller may apply for a reduced or eliminated withholding amount through IRS Form 8288-B if the actual tax liability is less than the standard withholding rate.
Key Takeaway: FIRPTA provides several exemptions, including the personal-use residence exception, non-foreign seller certifications, and domestically controlled REIT interests. A withholding certificate can also reduce or eliminate withholding when the seller’s actual tax liability is below the standard rate.
How Can FIRPTA Withholding Be Reduced or Eliminated?
A foreign seller may request reduced or eliminated FIRPTA withholding by applying for a withholding certificate (IRS Form 8288-B) before the transaction closes. The IRS may approve a reduced withholding if the actual tax liability is lower than 15% of the sale price. If Form 8288-B is filed on or before the date of disposition and remains pending at closing, the buyer must still withhold, but generally does not have to report and pay the amount to the IRS until 20 days after the IRS mails the withholding certificate or denial notice.
For example, if a foreign seller purchased a condominium for $1.5 million and sells it for $1.6 million, the actual capital gain is $100,000. The standard 15% withholding on $1.6 million would be $240,000, far exceeding the tax owed on the $100,000 gain. In such cases, a withholding certificate can reduce the withholding to match the actual tax liability.
What Is IRS Form 8288-B and How Do You File It?
To apply for a FIRPTA Withholding Certificate, the foreign seller must complete IRS Form 8288-B. This form is used to request a reduction or elimination of the standard 15% withholding tax on the sale of U.S. real property. It’s important to file the form on or before the closing date. Delays in submission may result in the full withholding being applied.
Form 8288-B must include clear and accurate details about the transaction. These include a description of the property, the sales price, and the full names and contact information of both buyer and seller. The form should also state the requested amount of withholding and the valid reason for the request.
Supporting documents are required to complete the application. These may include
- The signed purchase agreement
- The settlement statement
- Any other documents that help explain the sale and support the requested withholding amount.
The form must be signed by the seller or a legal representative with proper authorization.
Once completed, the form and supporting documents are submitted to the IRS. It generally acts on complete withholding certificate applications within 90 days, but delays can occur. So, an early submission is recommended. A timely application may allow the buyer to hold the funds rather than remit them to the IRS while the application is pending.
Filing a complete and accurate application can help reduce or eliminate unnecessary withholding and prevent delays in receiving sales proceeds. It’s helpful to prepare well in advance of the closing date to gather all the required information and documents.
Key Takeaway: Foreign sellers can apply to reduce FIRPTA withholding by filing Form 8288-B with the IRS before closing. The application requires detailed transaction information and supporting documents, and processing takes up to 90 days.
Does FIRPTA Interact with a 1031 Exchange?
A foreign seller may use a Section 1031 like-kind exchange to defer capital gains taxes by reinvesting the proceeds from a U.S. real property sale into another qualifying property. When structured properly, a 1031 exchange may also defer FIRPTA withholding obligations.
However, FIRPTA withholding is not automatically waived in a 1031 exchange. The foreign seller must apply for a withholding certificate using Form 8288-B to request reduced withholding based on the planned exchange. The IRS will review whether the exchange qualifies and may approve reduced withholding or allow the funds to be held in escrow by a qualified intermediary during the exchange period.
Coordinating a 1031 exchange with FIRPTA compliance requires careful timing and documentation. The exchange must meet strict deadlines: the replacement property must be identified within 45 days and be completed within 180 days after the transfer of the relinquished property or by the due date of the taxpayer’s return, including extensions, for that tax year, whichever is earlier.
Both the qualified intermediary and the closing attorney must work together to handle withholding obligations while facilitating the exchange. Foreign sellers considering a 1031 exchange should consult with an attorney experienced in both FIRPTA and tax-deferred exchanges.
Key Takeaway: Foreign sellers can use a 1031 exchange to defer capital gains and potentially reduce FIRPTA withholding, but they must file Form 8288-B and coordinate closely with a qualified intermediary and legal counsel.
How Does FIRPTA Work in New York Transactions?
New York City is one of the largest markets for foreign real estate investment in the United States. Foreign buyers and sellers are active in residential and commercial property markets throughout the city, which means FIRPTA compliance is a routine consideration in many closings. Both buyers and sellers must account for federal FIRPTA withholding as well as separate New York State withholding requirements.
Does New York Have Its Own Withholding Requirements?
Yes. In addition to federal FIRPTA withholding, New York State requires nonresident individuals, estates, and trusts to pay estimated income tax due on the gain from a real estate sale.
The exact form required depends on the structure of the property:
- Form IT-2663 (Nonresident Real Property Estimated Income Tax Payment Form) must be filed by nonresidents selling traditional real property interests, such as townhouses or condominiums.
- Form IT-2664 (Nonresident Cooperative Unit Estimated Income Tax Payment Form) must be used if the transaction involves selling a cooperative apartment, since co-ops represent corporate shares rather than land deeds.
Form IT-2663 (or IT-2664) and the corresponding payment are submitted to the county recording officer when the conveyance documents are presented for recording. The amount is based on the estimated gain from the sale, not the gross sale price. This differs from FIRPTA, where the withholding is calculated as a percentage of the total amount realized.
Buyers and sellers must comply with both federal and state withholding obligations simultaneously. Failure to address either requirement can result in penalties and delays at closing. A closing attorney familiar with both FIRPTA and New York State withholding rules can coordinate both filings to keep the transaction on schedule.
Key Takeaway: New York imposes its own estimated tax withholding requirements via Form IT-2663 for real property and Form IT-2664 for cooperative units. These apply to nonresident sellers in addition to federal FIRPTA withholding.
What Are the Penalties for FIRPTA Non-Compliance?
Penalties for non-compliance with FIRPTA can be significant. Under IRC § 1445, the buyer is the party primarily responsible for withholding and remitting the tax, and failure to do so creates direct liability for the buyer.
The IRS states that the withholding agent is personally liable for the full amount required to be withheld, plus penalties and interest. When a buyer fails to withhold the required amount, the IRS can assess the following penalties:
| Penalty Type | Amount |
|---|---|
| Unpaid withholding | Unwithheld tax, plus interest and applicable penalties |
| Interest | Accrues from the date the withholding was due |
| Late filing penalty | Up to 25% of the unpaid tax for failing to file Form 8288 on time |
| Accuracy-related penalty | 20% of underpayment if due to negligence or disregard of rules |
Both buyers and sellers should take steps to confirm the seller’s tax status and arrange proper withholding before closing. An experienced real estate attorney can help avoid these penalties by verifying compliance with all FIRPTA obligations before the transaction closes.
Key Takeaway: Buyers who fail to withhold under FIRPTA face liability for 100% of the unpaid tax, plus interest and penalties. The IRS does not accept ignorance of the law as an excuse for non-compliance.
Working with a New York Foreign Investment Lawyer
Whether you need help with withholding calculations, Form 8288-B applications, or coordinating federal and state tax requirements, experienced legal counsel can protect your interests throughout the transaction.
atalia A. Sishodia, Esq., LL.M., and our team have extensive experience representing foreign investors, buyers, and sellers in Manhattan real estate transactions. We handle all aspects of FIRPTA compliance, including withholding, exemption analysis, and coordination with the IRS and New York State.
Call Sishodia PLLC at (833) 616-4646 or visit our office at 600 3rd Ave, 2nd Floor, New York, NY 10016. We serve clients throughout Manhattan and the greater New York City area. Schedule a consultation today.
Frequently Asked Questions About FIRPTA
Does FIRPTA apply to commercial real estate in New York?
Yes. FIRPTA applies to all types of U.S. real property interests, including commercial properties, residential properties, and undeveloped land. Commercial real estate sales involving foreign sellers are subject to the same withholding requirements as residential transactions.
Can a foreign seller avoid FIRPTA withholding entirely?
In limited cases, yes. If the sale price is under $300,000 and the buyer certifies the property will be used as a personal residence, withholding may be waived. A foreign seller can also apply for a withholding certificate through Form 8288-B if their actual tax liability is zero or below the standard withholding rate.
What is the deadline for filing Form 8288 after closing?
The buyer must file Form 8288 and remit the withheld tax to the IRS within 20 days after the closing date. Late filing can result in penalties of up to 25% of the unpaid amount.
Who pays FIRPTA: the buyer or the seller?
The tax is the seller’s obligation, but the buyer is responsible for withholding the amount from the sale proceeds and remitting it to the IRS. If the buyer fails to withhold, the buyer becomes personally liable for the unpaid tax.
Does FIRPTA apply if the foreign seller takes a loss on the sale?
FIRPTA withholding may still be required at closing even if the seller expects to take a loss. However, the seller can file Form 8288-B to request reduced or zero withholding based on the anticipated loss. The seller can also claim a refund when filing their U.S. income tax return.
How long does a FIRPTA withholding certificate take to process?
The IRS typically processes Form 8288-B applications within 90 days, but actual processing times may vary due to several administrative and environmental factors. Early submission, ideally before the closing date, is recommended to avoid full withholding at closing.
What is the difference between FIRPTA and the New York IT-2663?
FIRPTA is a federal withholding requirement under IRC § 1445 that applies when a foreign person sells U.S. real property. Form IT-2663 generally applies to nonresident individuals, estates, and trusts selling New York real property. Both may apply to the same transaction and must be addressed separately.
Do I need a lawyer to handle FIRPTA compliance?
While there is no legal requirement to hire an attorney, FIRPTA involves strict deadlines, calculations, and significant penalties for non-compliance. An experienced real estate attorney can ensure all withholding obligations are met and assist with Form 8288-B applications to reduce unnecessary withholding.
