Understanding FIRPTA Withholding: A Practical Overview
- Richard Kahn
- Oct 3, 2024
- 2 min read
The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted by Congress in 1980 to help ensure that foreign sellers of U.S. real estate report and pay any U.S. tax that may be due on the transaction.
To accomplish that goal, FIRPTA generally requires the buyer to withhold a portion of the seller's proceeds and remit those funds to the IRS.
The Buyer's Responsibility
Many foreign sellers are surprised to learn that the legal responsibility for FIRPTA withholding generally rests with the buyer.
Failure to properly withhold, file the required IRS forms, or timely remit the withholding may expose the buyer to the tax, interest, and applicable penalties.
Depending on the circumstances, closing professionals acting on behalf of the parties may also become involved in resolving compliance issues.
Our Most Requested FIRPTA Service
To simplify the process, FIRPTA Refunds prepares our FIRPTA Closing Remittance Package (BCP), formerly known as the Buyer's Closing Package.
The package typically includes:
IRS document preparation
Required affidavits and certifications
Filing instructions
Paid preparer services
Remittance guidance
Closing coordination
Our objective is to help buyers and closing professionals complete their FIRPTA responsibilities accurately and confidently.
FIRPTA Withholding Is Not Always 15%
Many people assume FIRPTA withholding is always 15%.
That is not always the case.
Depending on the transaction, the property's intended use, available exceptions, and other IRS rules, the applicable withholding rate may be:
0%
10%
15%
Proper transaction evaluation is essential before determining the appropriate withholding.
More Than Just a Sale
Under the Internal Revenue Code, a disposition may include more than a traditional sale.
It can also include certain exchanges, gifts, liquidations, transfers, and other transactions involving U.S. real property interests.
Each transaction should be evaluated on its own facts.
What If the Seller Doesn't Have an ITIN?
A foreign seller does not need an ITIN to complete the sale.
However, an ITIN is generally required later to file a U.S. tax return or claim a refund.
When sellers do not already have an ITIN, proper planning becomes especially important.
As a Certified Acceptance Agent (CAA), we assist eligible clients with ITIN applications,
FIRPTA filings, and IRS communications throughout the process.
Specialized FIRPTA Experience
FIRPTA transactions involving corporations, LLCs, partnerships, trusts, estates, and other ownership structures often require additional analysis.
Those situations should be evaluated before closing to determine the appropriate filing strategy.
The Bottom Line
FIRPTA compliance involves far more than simply preparing IRS forms.
Successful representation begins with evaluating the transaction, identifying the best lawful strategy, and preparing the required filings accurately the first time.
Experience and judgment begin long before the first IRS form is ever prepared.
Related Resources
Can FIRPTA Withholding Be Reduced Before Closing?
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