- Commercial Litigation
- Criminal Tax Representation
- Cross-Border Mergers and Acquisitions
- Cryptocurrency Tax Matters
- Estate and Gift Tax for Foreign Investors
- Estate Tax Planning
- Expatriation
- FBAR Preparation and Penalty Defense
- FIRPTA
- Independent Contractor Disputes
- International Penalties
- International Tax Planning and Advice
- IRS Offshore Voluntary Disclosure Representation
- IRS Representation and Compliance
- Preparation of Form 3520
- Preparation of Form 5471
- Preparation of Form 5472
- Preparation of Form 8621 and PFIC Reporting
- State Tax Planning and Litigation
- Tax Audits, Controversies, and Litigation
- Tax Planning and Opinions
- Tax Planning of Cross-Border Cloud Computing Transactions
- Tax Preparation
- Tax-Exempt and Nonprofit Organizations
- Taxation of Foreign Pensions

FIRPTA

U.S. real estate has become a popular investment with foreigners. However, few foreign investors fail to consider the Foreign Investment in Real Property Tax Act (“FIRPTA”) implications of holding U.S. real property. There are significant income, gift and estate tax consequences that may result when U.S. real property is sold or transferred.
Under FIRPTA, gains or losses realized by foreign corporations or nonresident alien individuals from any sale, exchange, or other dispositions of a U.S. real property interest are taxed in the same manner as income effectively connected with the conduct of a U.S. trade or business. This means that gains from dispositions of U.S. real property interests are taxed at the regular graduated rates, whereas losses are deductible from effectively connected income.
A U.S. real property interest includes interests in any of the following types of property located within the United States:
- Land;
- Buildings, including a personal residence;
- Inherently permanent structures other than buildings;
- Mines, wells, and other natural deposits;
- Growing crops and timber; and
- Personal property associated with the use of the real property.
For this purpose, an “interest” in real property means any interest (other than an interest solely as a creditor), including fee ownership, co-ownership, a leasehold, an option to purchase or lease property, a time-sharing interest, a life estate, remainer, or reversion interest, and any other direct or indirect right to share in the appreciation in value or proceeds from the sale of real property.
A U.S. property interest also includes interest (other than an interest solely as a creditor) in a domestic corporation that was a U.S. real property holding corporation at any time during the five-year period ending on the date of the disposition of such interest or, if shorter, the period the nonresident held the interest. This prevents foreign persons from avoiding the FIRPTA tax by incorporating their U.S. real estate investment and then realizing the resulting gains through stock sales which may be exempt from U.S. tax.
To ensure collection of the FIRPTA tax, any transferee or buyer acquiring a U.S. property interest must deduct and withhold a tax equal to 15 percent of the amount realized on the disposition. A transferee is any person, foreign or domestic, that acquires a U.S. real property interest by purchase, exchange, gift, or any other type of transfer. The amount realized is the sum of the cash paid or to be paid, the market value of other property transferred or to be transferred, the amount of liabilities assumed by the transferred, and the amount of liabilities to which the transferred property was subject. Withholding requirements also apply to distributions made by a domestic or foreign corporation, partnership, estate, or trust, to the extent the distribution involves a U.S. real property interest, as well as to dispositions of interests in a partnership, trust, or estate that has a U.S. real property interest.
If the buyer is an individual person who will acquire the real property for personal use as a “personal residence,” there is an exception to the FIRPTA withholding rules. If the sales price is $300,000 or less, then the tax withholding is not required. To qualify under the personal residence exemption, the transferee or certain members of the transferee’s family (including brothers, sisters, spouses, or lineal descendants) must intend to reside at the property for more than 50 percent of the number of days that the property is used by any person for residential purposes during each of the two years following the acquisition of the property. The “personal residence” exception to the FIRPTA withholding rules is dangerous for transferees of U.S. real estate. If the property is not used as a “personal residence,” the transferee may be liable for the foregone withholding tax.
If the sales price of U.S. real estate is equal to or greater than $300,001, but equal to or less than $1 million then the seller would qualify for reduced withholding in the amount of 10 percent (instead of 15 percent). If the sales price is greater than $1 million, then no exception applies, and the buyer is responsible for withholding 15 percent of the amount realized by the seller.
If FIRPTA withholding is required, there are a number of procedures that must be followed. As with withholding taxes in general, a transferee that fails to withhold is liable for any uncollected taxes. Along with withholding, a transferee or buyer has an obligation to file with the IRS Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests for each foreign investor disposing of real property located in the U.S. These forms must be filed with the IRS no later than the 20th day after the date of the transfer.
From the foreign seller’s perspective, the withholding amount is usually greater than its U.S. federal income tax liability. The foreign seller has two options. First, the nonresident can have the transferee or buyer withhold the 15 percent. The nonresident can then file a U.S. federal tax return and request a refund for any overpayment of taxes. The foreign investor’s other option is to file a Form 8288-B with the IRS on or before the date of the transfer. Although the transferee or buyer will still need to withhold 15 percent of the amount realized in escrow, the purchaser does not need to report or pay over these monies to the IRS until the 20th day following the sale or transfer of the real property. In the meantime, the transferor or seller of the property can file a Form 8288-B and request a withholding certificate to reduce or eliminate withholding on the disposition of the real property. A transferor or seller can request a reduction in the FIRPTA withholding based on:
- a claim is made that the transferor is entitled to nonrecognition treatment or is exempt from tax (i.e. a tax treaty reduces or eliminates the U.S. tax on the disposition of the real property);
- A claim is made solely on a calculation that shows the transferor’s maximum tax liability is less than the tax otherwise required to be withheld; or
- A claim is made that special installment sales rules which are described in Section 7 of Rev. Proc. 2000-35 are permitted in the disposition of the real property to reduce withholding. In the past, the IRS would normally act on a Form 8288-B submission within 90 days of receipt of all information. These days, the processing time of a Form 8288-B can be much longer. In order to avoid unnecessary withholdings, the Form 8288-B should be submitted to the IRS as early as practically possible. The Form 8288-B must be accurately completed in order to avoid a rejection of the application. At a minimum, the following information will be necessary to properly complete the Form 8288-B:
The name of the transferor of the property and the identification number of the transferor.
2. The name or names of the party or parties transferring the property and the identification number.
3. A full description of the property being transferred (for example, “10-story, 100 unit apartment building).
4. The sales price of the property being transferred and the adjusted basis in the property.
5. It is necessary to tell the IRS whether or not tax returns for the three preceding tax years were filed. The definition of U.S. income tax returns includes Form 1120-F that is required to be filed by foreign corporations that have a direct or indirect interest in the U.S. property.
6. It is necessary to state on the Form 8288-B the maximum U.S. tax liability for the sale of the property. The maximum U.S. tax liability can be determined through the contract for the sale of the property, invoices for improvements to the property, and depreciation schedules on previously filed tax returns. Special rules apply under Rev. Proc. 2000-35, Section 4.06 for net operating losses. Documents used to determine the maximum U.S. tax liability may also need to be submitted to the IRS with the Form 8288-B.
7. If a reduction in the withholding is requested under a U.S. income tax treaty, the provision and an explanation must be submitted with the Form 8288-B.
The Form 8288-B must be signed under penalties of perjury by the nonresident transferor or a responsible corporate officer. The Form 8288-B may also be signed by an authorized agent such as an attorney admitted to practice before the IRS.
We have substantial experience in advising clients in FIRPTA matters and preparing the required FIRPTA returns with the IRS and state taxing agencies. The attorneys at Diosdi & Liu, LLP are also frequent speakers on this area and have published articles on FIRPTA.
- Commercial Litigation
- Criminal Tax Representation
- Cross-Border Mergers and Acquisitions
- Cryptocurrency Tax Matters
- Estate and Gift Tax for Foreign Investors
- Estate Tax Planning
- Expatriation
- FBAR Preparation and Penalty Defense
- FIRPTA
- Independent Contractor Disputes
- International Penalties
- International Tax Planning and Advice
- IRS Offshore Voluntary Disclosure Representation
- IRS Representation and Compliance
- Preparation of Form 3520
- Preparation of Form 5471
- Preparation of Form 5472
- Preparation of Form 8621 and PFIC Reporting
- State Tax Planning and Litigation
- Tax Audits, Controversies, and Litigation
- Tax Planning and Opinions
- Tax Planning of Cross-Border Cloud Computing Transactions
- Tax Preparation
- Tax-Exempt and Nonprofit Organizations
- Taxation of Foreign Pensions

Written By Anthony Diosdi
Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.
