What is FIRPTA?

What is FIRPTA? It is the tax withholding a foreign seller will likely need to pay at a real estate closing, if they do not have a social security number. People from all over the world invest in real estate in the United States. They do not need to live here, or work here, be a citizen or have a social security number. If they have the money or can obtain lending, they can purchase real estate.

However, there are taxes associated with sales. For real estate, there is tax owed for any profit on a sale. If a seller doesn’t have a social security number, how would they pay tax to the IRS?

This burden falls onto the buyer. It’s the buyer’s obligation to withhold the correct amount. When

At closing, the title company (or owner) will withhold (temporarily keep) a portion of the sales proceeds back from the seller. This withholding is typically 15% of the selling price, and is withheld from being paid out to the foreign seller at closing. The seller, after closing, must file a tax return with the IRS. Once the IRS determines how much tax is owed on the sale of the property, any balance will be returned to the foreign seller.

After the sales closing is complete, foreign sellers have up to 20 days to file Form 8288 with the IRS, which will reduce or eliminate the FIRPTA withholding.

If the sale is done through a real estate agent, closing agent and/or attorney, that FIRPTA withholding will be handled without any complication for the buyer. The closing agent or attorney will hold that money and release it once the IRS gives the okay. 

It’s a good idea for foreign sellers to use a real estate agent, closing agent and/or attorney that is experienced in handling FIRPTA sales. This will help ensure potential pitfalls are though of, avoided and dealt with properly.