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What is FIRPTA — and Why Is a FIRPTA Affidavit Important?

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What is FIRPTA? | Who Pays It? | What’s a FIRPTA Affidavit? | Cost | FIRPTA Exemptions| FAQs

What is FIRPTA?

FIRPTA stands for Foreign Investment in Real Property Tax Act. It’s a 1980 law that ensures foreign taxpayers pay income tax on U.S. property sales (as well as exchanges, liquidations, or transfers of property).If you live in the U.S., capital gains tax is taken out of your regular income tax when you file your return. But foreign persons are taxed only on certain types of income, and aren’t taxed on most capital gains items, including real estate.

In a nutshell: FIRPTA makes it possible for the U.S. government to get its share of the taxes from real estate sales.

» Read the Source: Internal Revenue Code Notice 1445

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Who Pays a FIRPTA Tax?

Technically, the foreign seller owes a FIRPTA tax — but in practice, the buyer is held responsible for setting the money aside from the proceeds of the sale.

Why does the buyer have to withhold tax for the seller? The thought is to keep a foreign resident from taking proceeds from the sale of the US property back to their home country. Before FIRPTA, the U.S. government was unlikely to collect this tax unless the foreign seller volunteered to file a U.S. tax return. So, there was no effective way to collect the tax.

If you’re buying property from a foreign seller, you’ll have to send the funds to the IRS within 20 days of the closing, along with two forms:

  • Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
  • Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests

The buyer will enter the amount subject to withholding.

Typically, the closing agent responsible for disbursing the closing funds handles this on behalf of the buyer.

What Is a FIRPTA Affidavit?

A FIRPTA affidavit, also known as Affidavit of Non-Foreign Status, is a form a seller purchasing a U.S. property uses to certify under oath that they aren’t a foreign citizen.

The form includes the seller’s name, U.S. taxpayer identification number and home address. It’s used to protect the buyer – as long as the buyer doesn’t have actual knowledge that the statement isn’t true.

Without the form, a buyer has no way to know for certain if the person selling them a U.S. property is a foreign resident. In fact, a U.S. tax identification number alone isn’t enough to prove that a person is a U.S. citizen.

If you’re buying property, you should make sure the seller signs a FIRPTA Affidavit to protect yourself. You shouldn’t take the seller’s word for it — or you could face serious penalties for not abiding by FIRPTA rules if they apply.

FIRPTA Penalties
  • A buyer can be penalized for not determining or disclosing a foreign seller.
  • The buyer’s real estate agent can also be held liable – to the extent of their commission – if they have actual knowledge that the seller is a foreign person and there has been no withholding.
  • If the buyer doesn’t withhold properly, they may be held liable for the seller’s tax!
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How Much Is FIRPTA Withholding?

The amount of FIRPTA tax to be withheld depends on two factors:

  • The amount of the proceeds from the sale
  • Whether the buyer intends to reside in the purchased property

Federal Withholding Tax

You won’t pay a FIRPTA tax if:

  • The purchase price is less than $300,000
  • You (or a family member) plan to live in the property for at least 50% of the time for two years after closing

Your required withholding will be 10% if:

  • The purchase price is between $300,000 and $1,000,000
  • You (or a family member) plan to live in the property for at least 50% of the time for two years after closing

Your required withholding will be 15% if:

  • The purchase price is over $1,000,000
  • OR if you don’t intend to use the property as your residence, regardless of the sale price

The withholding amount (either 10% or 15%) is applied to taxes owed on the sale or other disposition of the property. If the actual taxes are less than the amount withheld, the seller will receive a refund for the difference.

If no taxes were owed, the entire deposit will be refunded to the seller.

FIRPTA Withholding Certificate

A seller can obtain a refund if they file a U.S. tax return the year following the U.S. property purchase.

Or, if the seller wants a refund quickly, they can file a FIRPTA Withholding Certificate. It must be submitted no later than the closing date. The funds will typically be held in escrow until the FIRPTA certificate is either approved or rejected by the IRS.

If the certificate has been filed properly, the IRS will tell the withholding agent to release the approved withholding amount directly back to the seller.

So, instead of having to wait until filing next year’s tax return to get a refund (if they were planning to file a return), the foreign seller can get their funds back in about three or four months.

State Withholding

Some states require buyers to withhold an additional amount to cover taxes that may be owed by sellers, even if the sellers are U.S. citizens who reside in that state.

For example, California – a state popular among foreign investors – requires that 3.33% of the sales proceeds be withheld by buyers and deposited with the state’s Franchise Tax Board, whether the seller is or isn’t a California resident.

Consult your real estate agent, as well as a CPA or attorney familiar with the law in your state, to make sure you comply. Just like the federal deposits, the seller gets a refund if taxes owed turn out to be less than the amount withheld.

What Are FIRPTA Exemptions?

A seller may be exempt from FIRPTA if one or more of these circumstances apply:

  • The sales price is less than $300,000 and the buyer (or a family member) has definite plans to reside in the home for at least 50% of the first 24 months of ownership
  • The seller provides written certification that they are not a foreign person
  • The buyer receives a withholding certificate from the IRS that excuses the withholding
  • The seller doesn’t earn any proceeds from the sale or transfer of property

FIRPTA rules can be complicated. You should consult with a Certified Public Accountant (CPA) or real estate attorney to make sure you fully comply with the law and avoid penalties. And use an experienced real estate agent, preferably one who has handled FIRPTA transactions before.

FIRPTA Residency Exemption Example

A buyer can be considered a resident of the U.S. property they purchase if they or a family member plan to live in the property at least 50% of the first two years after the closing date.

For example, let’s say you purchase U.S. real estate for $299,000 on January 1, 2017. You’re single and you have an adult daughter, and you both live together in the home through the end of April 2017.

On May 1, 2017, you decide to take a temporary position overseas. You live there for eight months while your daughter lives in the U.S. residence. You return on January 1, 2018, and live there for an additional five months, when you take another temporary overseas job that lasts until February 22, 2019.

Although you only resided at the property for about 33% of 2017 and 42% of 2018, your daughter resided there 100% of both years.Therefore, the property is considered a residence of the buyer for all of 2017 and 2018 — and you won’t owe FIRPTA tax.

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Recommended Reading


What is FIRPTA?

FIRPTA is an acronym for the Foreign Investment in Real Property Tax Act, a 1980 section of the Internal Revenue Code that ensures foreign persons pay income tax on U.S. property sales. Learn more about what FIRPTA is.

What does FIRPTA stand for?

FIRPTA stands for the Foreign Investment in Real Property Tax Act. Learn more about FIRPTA requirements.

What is a FIRPTA Affidavit?

A FIRPTA affidavit, also known as Affidavit of Non-Foreign Status, is a IRS form that a seller purchasing a U.S. property signs to certify under oath that they aren’t a foreign citizen. Learn more about the importance of getting a FIRPTA affidavit.

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