FIRPTA: Withholding When a Foreign Owner Sells US Property

FIRPTA stands for the Foreign Investment in Real Property Tax Act. It applies when someone who isn't a US citizen or resident sells US real estate. The buyer has to hold back a share of the sale price and send it to the IRS, so the tax gets collected before the foreign seller takes the money home.

The rates

For most rental property sales the withholding is 15% of the gross sale price. There are reduced rates for lower-priced homes the buyer will live in: 10% for sales between US$300,000 and US$1 million, and none at US$300,000 or less. A buyer who is purchasing a rental doesn't get those lower rates.

The IRS publishes the details on its FIRPTA withholding page, and the rules can change.

An example

You bought a rental for US$150,000 and sell it for US$200,000. At closing, the buyer withholds 15%, or US$30,000, and you receive the rest less the usual costs.

Your actual gain is about US$50,000 before costs, and the real tax on that could be much lower than US$30,000. The withholding counts toward the tax you owe, and anything over that comes back when you file. You file a US tax return for the year of the sale, and the IRS refunds any excess. That can take months.

Ways to reduce it

You can apply to the IRS for a withholding certificate using Form 8288-B. If it's approved, the amount withheld matches your actual expected tax. The IRS can take months, so apply as soon as you have a contract and tell the title company. The buyer may hold the money while the IRS decides.

Why it matters when you buy

FIRPTA affects your exit, but you'll deal with it at the sale. Plan on cash being tied up for a while after closing, and keep the records you'll need for the return: the purchase price, closing costs, improvements and depreciation claimed over the years.

Related terms

Foreign owners also usually need an ITIN to file the US return that claims the refund. The Canadian investor guide covers how FIRPTA fits with the rest of the tax picture. This is general information, so confirm the details with a cross-border accountant.