How FIRPTA Works: A Step-by-Step Guide for Foreign Real Estate Sellers

Selling U.S. real estate as a foreign national can be a profitable move — but it comes with important tax rules. One of the biggest is the Foreign Investment in Real Property Tax Act (FIRPTA). If you’re unfamiliar with how FIRPTA works, you risk costly mistakes, unnecessary tax withholding, or even IRS penalties.

In this guide, Freedom Tax Accounting explains how FIRPTA works, who it affects, and how foreign sellers can navigate the process smoothly.

What Is FIRPTA and Why Does It Exist?

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires foreign individuals and entities selling U.S. real estate to pay tax on the gain from the sale. To ensure collection, the law mandates buyers withhold a percentage of the sales price at closing.

Before FIRPTA, many foreign sellers left the U.S. without paying capital gains taxes, and the IRS had no easy way to collect. FIRPTA closed that loophole, making the buyer the party responsible for collecting the withholding.

Who Is Subject to FIRPTA?

FIRPTA applies if you are:

• A nonresident alien individual selling U.S. real estate
• A foreign corporation, partnership, trust, or estate selling U.S. real property
• An entity with foreign owners selling a property classified as a U.S. real property interest 

Even if you have owned the property for decades or only recently purchased it, FIRPTA applies based on your tax residency status, not your visa or immigration status.

Which Transactions Trigger FIRPTA?

FIRPTA covers a wide range of property sales, including:

• Homes and condos
• Vacant land
• Commercial buildings
• Farms and ranches
• Certain interests in partnerships or trusts that hold U.S. real estate

Importantly, FIRPTA applies whether or not the sale results in a gain. The withholding is based on the gross sales price, not your profit.

Step-by-Step: How FIRPTA Works

Alt-Text for the infographic is “Step by Step: How FIRPTA Works”

1. Understand the withholding rates
   The typical FIRPTA withholding is: 
   • 15% of the gross sales price for most transactions
   • 10% if the buyer acquires the property as a residence and the price is $300,000–$1 million
   • 0% if the sale price is under $300,000 and the buyer intends to use it as a residence 
2. These rates apply even if you don’t make a profit — that’s why advance planning is critical. 
3. Obtain an ITIN or TIN
   You will need a valid Individual Taxpayer Identification Number (ITIN) or Taxpayer Identification Number (TIN) for the sale. Without it, the buyer cannot complete IRS filings, and the withholding process can stall. 
4. Buyer’s responsibility to withhold
   Although FIRPTA is a seller’s tax obligation, the buyer (or withholding agent) is legally responsible for withholding and submitting funds to the IRS. Failure to do so can result in hefty penalties. 
5. File IRS Forms 8288 and 8288-A
   The buyer must file: 
   • Form 8288: Report of the withholding
   • Form 8288-A: Statement of the amount withheld
     These forms, along with the withheld funds, are submitted to the IRS within 20 days of the closing date. 
6. Apply for a withholding certificate (optional but recommended)
   If you expect your actual tax liability to be less than the standard withholding, you can apply for a withholding certificate using Form 8288-B.
   This can reduce or eliminate the withholding, but you must apply before the closing. 
7. File your U.S. tax return
   After the sale, you are required to file a U.S. tax return: 
   • Form 1040-NR (for individuals)
   • Appropriate corporate or partnership tax return (for entities) 
8. You report the sale, calculate your true tax liability, and claim a refund if too much was withheld. 

Example Scenario: How FIRPTA Plays Out

Let’s say Ana, a nonresident alien from Colombia, sells her U.S. condo for $500,000. She has no mortgage on the property.

• The buyer withholds 15% ($75,000) at closing under FIRPTA.
• Ana applies for a withholding certificate because she expects her gain will only result in $20,000 of U.S. tax.
• If approved before closing, the buyer might only need to withhold $20,000.
• After the sale, Ana files a 1040-NR to reconcile the transaction and get a refund if applicable.

Without proper planning, Ana could unnecessarily tie up $55,000 with the IRS for months.

Common Mistakes Foreign Sellers Make

• Waiting too long to apply for an ITIN → can delay closing
• Skipping the withholding certificate → can lock up money for months
• Not filing a U.S. tax return → forfeits potential refunds
• Ignoring buyer’s role → puts the buyer at risk and can derail the deal 

How to Recover FIRPTA Withholding

If you’ve already sold your property and had FIRPTA withheld, you may be eligible for a refund if the amount withheld exceeded your true tax liability.

👉 Read our complete guide here:
How to Get FIRPTA Withholding Back from the IRS

Why You Need a CPA for FIRPTA Transactions

FIRPTA is complex, and one error can cost you thousands or delay your funds for a year or more. Working with an experienced CPA can help you:

• Apply for an ITIN
• File for a withholding certificate
• Ensure proper IRS filings
• Prepare your U.S. tax return
• Maximize your refund 

Frequently Asked Questions (FAQ)

Q: How long does it take to get a FIRPTA refund?
A: If no withholding certificate was filed, refunds typically take 6–12 months after filing your tax return. If you apply for a withholding certificate, you can reduce or eliminate the need for a refund.

Q: Can I avoid FIRPTA withholding completely?
A: Only in very limited cases (e.g., the buyer intends to use the property as a residence and the price is under $300,000). Otherwise, the withholding applies, but you can reduce it with a withholding certificate.

Q: What happens if the buyer fails to withhold?
A: The IRS can pursue the buyer for the tax owed, plus penalties and interest. This is why buyers need guidance as much as sellers.

Additional Resources

• IRS FIRPTA Guidelines
• IRS Form 8288 Instructions
• ITIN Application Guide

About Freedom Tax Accounting

With decades of experience guiding foreign investors, Freedom Tax Accounting is your trusted partner for navigating FIRPTA, ITINs, and U.S. real estate taxes. We work closely with you from start to finish — from applying for a withholding certificate to filing your tax return and maximizing your refund. Contact us today to schedule a consultation and protect your money when selling U.S. real estate.