Home›Glossary›FIRPTA
GLOSSARY — REAL ESTATE TERMS

FIRPTA

FIRPTA (the Foreign Investment in Real Property Tax Act) requires a buyer to withhold a percentage of the sale price when purchasing property from a foreign seller, remitting it to the IRS to cover the seller's potential capital gains tax obligation.

How FIRPTA withholding works

When a seller is a foreign person under IRS rules, the buyer is generally required to withhold 15% of the gross sale price and send it to the IRS, rather than paying that amount to the seller at closing. This isn't a tax on the buyer -- it's a mechanism to ensure the IRS collects on the seller's potential capital gains obligation.

Who handles the withholding

In practice, escrow typically manages the withholding, filing, and remittance as part of the closing process, though the legal responsibility for compliance rests with the buyer. There are exceptions -- including for certain lower-priced properties intended as a buyer's residence -- that can reduce or eliminate the withholding requirement.

WHAT TO DO WHEN BUYING FROM A FOREIGN SELLER
  • Confirm with escrow early whether the seller qualifies as a foreign person under IRS rules
  • Ask whether any FIRPTA exceptions apply to your specific purchase price and intended use
  • Don't release withheld funds to the seller directly under any circumstances
  • Consult a tax professional if the transaction involves any FIRPTA complexity
RELATED TERMS
EscrowTitle InsuranceClosing Cost CreditTransfer Disclosure Statement
Does FIRPTA apply to every foreign seller?
Generally yes, though the exact withholding rate and exceptions depend on the sale price and the buyer's intended use of the property -- a tax professional should confirm which rules apply to a specific transaction.
Who is responsible for FIRPTA compliance?
Legally the buyer, though escrow companies typically manage the actual withholding and IRS filing as a standard part of closing when a foreign seller is involved.
Can the withholding amount be reduced?
In some cases, yes -- the seller can apply to the IRS for a withholding certificate reducing the amount based on their actual expected tax liability, though this requires advance planning before closing.