If you own U.S. real estate as a non-resident and you are thinking about selling, there is a three-letter acronym you need to understand before you sign anything: FIRPTA.
The Foreign Investment in Real Property Tax Act is a U.S. federal law that requires buyers — or more often, their closing agents — to withhold a percentage of the sale price when the seller is a foreign person or entity. The intent is simple: the IRS wants to make sure it collects taxes on gains earned by non-U.S. owners. But the mechanics can feel anything but simple, especially if it is your first time navigating them.
What Actually Gets Withheld
The standard withholding rate under FIRPTA is 15% of the gross sale price — not the gain, the entire sale price. For properties sold for less than $300,000 that will be used as the buyer's residence, the withholding may be reduced or eliminated. For sales over $1 million, the rate can be as high as 20%.
That distinction between gross price and actual gain is where most of the confusion starts. You might sell a property for $500,000 with only $40,000 in gain — but the withholding could still be $75,000. The difference is recoverable, but only through a tax filing after the fact. And "after the fact" can mean months of waiting without access to that capital.
Withholding Certificates: Planning Ahead
The IRS offers a mechanism called a withholding certificate (Form 8288-B) that allows sellers to apply for a reduced withholding amount before or at the time of closing. When approved, the withholding is based on the estimated tax liability rather than the full gross price.
This is where early planning matters. Filing for a withholding certificate is not something you do the week before closing. The IRS can take 90 days or more to process the application. If you know a sale is on the horizon — even six months out — it is worth beginning the conversation with your tax advisor early.
Entity Structures and FIRPTA
If you hold your U.S. property through an LLC or other entity, FIRPTA still applies — but the mechanics may differ. A single-member LLC that is disregarded for tax purposes is treated the same as direct ownership. Multi-member LLCs and corporations each have their own set of considerations.
One common misconception is that forming a U.S. entity eliminates FIRPTA exposure. It does not. What changes is how the withholding and reporting obligations are handled. In some cases, the entity structure introduces additional filing requirements rather than reducing them.
What You Can Do Now
Whether you are actively listing a property or just considering your options, there are a few things worth doing early:
- Confirm your tax basis. Know what you paid, what you improved, and what your adjusted basis is. This is the foundation for estimating your actual gain.
- Talk to your CPA about withholding certificates. If the expected gain is significantly less than 15% of the sale price, a withholding certificate application may save you a substantial amount of tied-up capital.
- Review your entity structure. Understand how your ownership entity interacts with FIRPTA before you get to the closing table — not at it.
- Keep documentation current. Prior-year tax returns, cost basis records, and entity formation documents should be organized and accessible.
FIRPTA is not a reason to avoid selling U.S. real estate. It is a reason to plan the sale with intention. The difference between a smooth transaction and a stressful one usually comes down to how early the conversation starts.
This article is for informational purposes only and does not constitute tax or legal advice. Consult a qualified tax professional for guidance specific to your situation.