Foreign persons selling United States real estate face a federal withholding regime that operates very differently from ordinary income tax. The Foreign Investment in Real Property Tax Act — FIRPTA — requires the buyer (acting as withholding agent) to withhold a percentage of the gross sale price at closing and remit it to the Internal Revenue Service. The mechanics matter, and the consequences of getting them wrong fall on the parties unequally.

This article describes the structure of the withholding regime, the forms involved, the withholding certificate process by which a foreign seller can reduce withholding to a more accurate figure, and the most common mistakes that delay closings and produce penalty exposure.

What FIRPTA Does and Why

The United States generally does not tax foreign persons on capital gains. FIRPTA is a long-standing exception to that rule. Under § 897, gain or loss on the disposition of a U.S. real property interest by a foreign person is treated as effectively connected with a U.S. trade or business and taxed as ordinary effectively-connected income. Section 1445 then layers a withholding regime on top: at closing, the buyer must withhold and remit a portion of the seller’s amount realized to the IRS as a downpayment against the seller’s ultimate U.S. tax liability.

The default withholding rate is fifteen percent of the amount realized — that is, fifteen percent of the gross sale price, not of the seller’s gain. For a foreign seller with a high cost basis, the default fifteen-percent withholding can substantially exceed the seller’s actual federal tax liability on the sale. The seller does not lose those funds permanently, but does have to file a U.S. tax return to claim them back as a refund, which can take a year or longer.

Who Is the Withholding Agent

FIRPTA places the withholding obligation on the buyer, not on the seller. This is structurally different from how withholding works in most other contexts. The buyer is personally liable for the tax that should have been withheld, plus interest and penalties, if withholding is incorrect or absent. As a practical matter, this means buyers (and their counsel and title companies) are highly motivated to over-withhold rather than under-withhold, and that the foreign seller is often the party most exposed to the consequences of mechanical error.

The buyer’s withholding agent obligations are administered through Forms 8288 and 8288-A. Form 8288 is filed with the IRS reporting the withholding; Form 8288-A is provided to the seller, who attaches it to the seller’s U.S. income tax return as evidence of the tax already paid. Both forms are due within twenty days of the closing.

Reducing Withholding: The Section 1445(b) Exemptions and the Withholding Certificate

Section 1445 contains several statutory exemptions that, properly invoked, eliminate or reduce the buyer’s withholding obligation. The most commonly relied-on exemption is for sales of personal residences for $300,000 or less, where the buyer intends to use the property as a residence. A second exemption applies where the seller furnishes a non-foreign affidavit certifying that the seller is not a foreign person. A third applies to certain entity-level transactions where the entity transfers an interest in a non-USRPHC.

For sales that do not qualify for a statutory exemption, the foreign seller’s primary tool to reduce withholding to a correct figure is the withholding certificate procedure of § 1445(c)(3). The seller files Form 8288-B with the IRS, before or shortly after closing, requesting a certificate that authorizes reduced withholding (or no withholding) based on the seller’s actual estimated tax liability on the sale. If the IRS issues the certificate before closing, the buyer withholds at the certified rate. If the application is pending at closing, the buyer holds the withheld amount in escrow until the IRS rules.

The withholding certificate process requires substantive documentation of the seller’s basis, holding period, expenses, and other facts that determine actual U.S. tax liability. It is not a routine paperwork exercise. For high-basis or low-gain sales, the difference between fifteen-percent gross-price withholding and certificate-based withholding can be substantial.

The 1031 Exchange Question

Foreign sellers attempting to defer gain through a like-kind exchange under § 1031 face an additional layer of complexity. The withholding rules apply at the time of the relinquished-property sale, even though the seller’s tax position is a deferral rather than a recognition event. Coordination between the qualified intermediary, the seller’s tax advisor, and the buyer’s closing agent is essential to ensure the withholding is properly calculated, escrowed, or released, and that the certificate process (if used) is timed correctly with the exchange identification and replacement deadlines.

Common Mistakes

The mistakes that most often produce problems on FIRPTA closings are not exotic. They tend to be mechanical:

• Treating the withholding obligation as the seller’s problem. It is not. It is the buyer’s personal liability. Buyers and buyer’s counsel who treat FIRPTA withholding as the seller’s administrative responsibility are exposing the buyer to significant personal liability.

• Relying on a non-foreign affidavit without verification. A foreign seller cannot give a valid non-foreign affidavit. Buyers who rely on representations of foreign-or-not-foreign status without verification (passport, ITIN, ownership history) lose the safe harbor and remain exposed to the withholding liability.

• Miscalculating the amount realized. The amount realized for FIRPTA purposes includes assumed liabilities, not just cash received. In a leveraged sale, this can substantially increase the withholding base.

• Missing the twenty-day filing deadline. Form 8288 is due twenty days after closing. Penalties for late filing are administered strictly.

• Failing to start the certificate application early enough. The IRS’s processing time for Form 8288-B applications has been variable. A foreign seller who waits until two weeks before closing to apply for a withholding certificate will almost always close with full withholding and recover the difference later through a refund claim.

When to Engage Counsel

Most ordinary residential FIRPTA closings can be handled by a competent title company and a closing attorney with FIRPTA experience. Where counsel adds value is in transactions involving entity-level structures, leveraged or partially-leveraged sales, like-kind exchanges, prior basis issues, expatriation considerations, or sales where the withholding certificate process is being used to reduce withholding from the default rate. Engaging counsel early — before the contract is signed, ideally — is far more effective than engaging counsel three days before closing when a certificate application has not yet been filed.