Here is a rule that surprises many homebuyers: when you purchase U.S. real estate from a foreign seller, the IRS makes you, the buyer, responsible for withholding part of the price and sending it to the IRS. It is called FIRPTA, and getting it wrong can leave you on the hook.
What FIRPTA is
FIRPTA (the Foreign Investment in Real Property Tax Act) ensures foreign sellers pay U.S. tax on gains from selling U.S. real estate. Because the seller may leave the country, the law collects the tax at closing — through withholding.
Why the buyer is on the hook
The buyer (or the closing agent on the buyer’s behalf) must withhold the correct amount and remit it. If you fail to withhold when required, the IRS can pursue you for the amount plus penalties and interest.
The 15% rule and its exceptions
The default withholding is 15% of the gross sales price (not the profit). Reduced rates apply when the buyer will use the property as a residence:
- Sales price $300,000 or less + buyer will use it as a residence → 0%
- Sales price $300,001–$1,000,000 + residence use → 10%
- Otherwise → 15%
How and when to file
The withheld amount is reported on Forms 8288 and 8288-A and must reach the IRS within 20 days of closing. The seller later receives credit for the amount withheld.
Reducing the withholding
If 15% of the price is far more than the seller’s actual tax, the seller can apply for a withholding certificate (Form 8288-B) before closing to reduce the amount. This is where a specialist saves everyone time and money.
Common mistakes to avoid
- Assuming FIRPTA doesn’t apply because the seller “lives here” — residency status matters, not where they happen to be.
- Missing the 20-day deadline.
- Applying a reduced rate without meeting the residence conditions.