FIRPTA: Foreign Investment in U.S. Real Property

FIRPTA — the Foreign Investment in Real Property Tax Act, enacted in 1980 and codified at 26 U.S.C. § 897 — taxes foreign persons on gains from dispositions of U.S. real property interests (USRPIs), closing a loophole that previously allowed foreign investors to sell U.S. real estate and leave the country before paying any tax on the gain. Because the IRS cannot easily collect from foreign sellers after they depart, Congress imposed the collection obligation on the buyer: 26 U.S.C. § 1445 requires buyers of U.S. real property from foreign sellers to withhold 15% of the gross sales price (not the gain — the entire price) and remit it to the IRS, creditable against the foreign seller's actual U.S. tax liability. FIRPTA applies not only to direct real estate sales but also to dispositions of interests in U.S. real property holding corporations (where more than 50% of assets are U.S. real property), sales of partnership interests where the partnership holds USRPIs, and certain REIT capital gain distributions — making it a pervasive feature of any cross-border U.S. real estate transaction. The 2015 PATH Act created an important exemption for qualified foreign pension funds, and various treaty provisions and REIT ownership thresholds create additional carve-outs, but the core regime — buyer withholds, foreign seller gets credit — governs the vast majority of foreign investment in U.S. real estate.

Current Law (2026)

Legal Authority

• 26 U.S.C. § 897(a) — Gain or loss of a nonresident alien individual or foreign corporation from the disposition of a USRPI is treated as effectively connected with a U.S. trade or business — meaning it is subject to U.S. income tax at the rates applicable to domestic taxpayers
• 26 U.S.C. § 897(c) — Defines "United States real property interest": real property located in the U.S. or U.S. Virgin Islands; interests in a corporation that is (or was within 5 years) a U.S. real property holding corporation
• 26 U.S.C. § 897(h) — Special rules for REITs: distributions from a REIT that are attributable to gain from sale or exchange of USRPIs are treated as gain from USRPIs in the hands of the recipient (subject to FIRPTA) unless the foreign shareholder owns less than 10% of the REIT's outstanding shares (publicly traded REITs) or less than 5% (non-publicly traded REITs)
• 26 U.S.C. § 1445(a) — Imposes the withholding obligation on the transferee (buyer): any person who acquires a USRPI from a foreign person must withhold 15% of the amount realized and pay it to the IRS
• 26 U.S.C. § 1445(b) — Exemptions from withholding: no withholding required if the seller furnishes a non-foreign affidavit (FIRPTA certificate); if the IRS issues a withholding certificate; if the amount realized is $300,000 or less and the buyer intends to use as a residence; or if the property is acquired by the U.S. government
• 26 U.S.C. § 897 (DB) — Disposition of investment in United States real property: requires that when a nonresident alien or foreign corporation sells or disposes of a U.S. real property interest, the gain or loss is treated as U.S. taxable income; includes special rules for REITs, partnerships, and qualified foreign pension funds; defines "United States real property holding corporation" as one where U.S. real property values are at least 50% of total real and business assets
• 26 U.S.C. § 1445 (DB) — Withholding of tax on dispositions of United States real property interests: the buyer must withhold 15% of the amount realized and remit to the IRS within 20 days of closing; withholding cannot exceed the seller's maximum tax liability; special rules apply to partnerships, trusts, and estate distributions of USRPIs to foreign beneficiaries

Key Mechanics

FIRPTA's core mechanism is buyer withholding: when a foreign person sells a U.S. real property interest (USRPI), the buyer — not the seller — must withhold 15% of the gross sales price (not the gain) and remit it to the IRS within 20 days of closing. The foreign seller then files a U.S. tax return, reports the actual gain at applicable rates, and claims a credit for the amount withheld. If withholding exceeds actual tax, the seller receives a refund — but only after filing a U.S. return and waiting for IRS processing, which can take 6–18 months. The withholding-at-source mechanism exists because the IRS cannot reliably collect from foreign sellers after they leave the country. FIRPTA covers not only direct real estate sales but also dispositions of interests in U.S. real property holding corporations (USRPHCs — corporations where 50%+ of asset value is U.S. real property during a 5-year look-back), partnership interests in partnerships holding USRPIs, and REIT capital gain distributions. Key exemptions include: sales where the buyer pays $300,000 or less and uses the property as a personal residence (zero withholding); qualified foreign pension funds (PATH Act 2015); and publicly traded REIT shareholders holding 10% or less (5% for non-publicly-traded REITs).

How It Works

Who is a "foreign person": FIRPTA applies to nonresident alien individuals, foreign corporations, foreign partnerships, foreign trusts, and foreign estates. U.S. citizens and resident aliens (green card holders, substantial presence test) are not subject to FIRPTA — they pay U.S. tax on worldwide income regardless of where they live. The FIRPTA withholding obligation is triggered when a transferee (buyer) acquires a USRPI from a foreign person.

The withholding mechanism: Rather than requiring the foreign seller to file a tax return and pay tax after closing — which would be practically unenforceable — § 1445 makes the buyer the withholding agent. The buyer must withhold 15% of the gross amount realized (the full contract price, not the seller's gain), complete Form 8288 and Form 8288-A, and remit the withheld amount to the IRS within 20 days of closing. The foreign seller then files a U.S. tax return (Form 1040NR for individuals, Form 1120-F for foreign corporations), reports the actual gain, pays tax at applicable U.S. rates, and receives a credit for amounts withheld. If the withholding exceeds the actual tax, the seller receives a refund — but only after filing a U.S. return and waiting for IRS processing, which can take 6–18 months.

Withholding rates by transaction size: The 15% standard rate applies to most transactions. For transactions where the buyer will use the property as a personal residence: if the sales price is $300,000 or less, no withholding is required; if the price is between $300,001 and $1,000,000, the withholding rate is 10% (reduced from 15%); if the price exceeds $1,000,000, the full 15% applies regardless of intended use.

U.S. real property holding corporations (USRPHCs): FIRPTA reaches through corporate structures. A corporation is a USRPHC if the FMV of its USRPIs equals or exceeds 50% of the combined FMV of all business assets during any 5-year look-back period. Foreign sellers of shares in a USRPHC must recognize FIRPTA gain as if they sold the underlying real estate. Exception: shares in a publicly traded corporation are not USRPIs if the foreign seller held 5% or less of any class of stock during the 5-year period before sale.

REIT special rules: Foreign investors in REITs face nuanced FIRPTA exposure. Regular REIT dividends attributable to USRPI gains are treated as FIRPTA income, subject to 21% withholding. However, if a foreign shareholder holds less than 10% of the outstanding shares of a publicly traded REIT (less than 5% for non-publicly traded REITs), capital gain distributions are not treated as FIRPTA gain — a significant exemption that enables diversified foreign investment in REIT shares at scale.

Withholding certificates and early applications: A foreign seller who knows their actual tax will be less than 15% of gross proceeds (e.g., because they have little gain or are selling at a loss) can apply to the IRS for a withholding certificate (Form 8288-B) before or at closing. If approved, the IRS issues a certificate specifying a reduced withholding amount. This process takes 90+ days and requires advance planning — sellers who don't apply in advance must accept 15% withholding at closing and wait for a refund.

The non-foreign affidavit: If the seller is a U.S. person (not subject to FIRPTA), they provide a "FIRPTA certificate" or "non-foreign affidavit" — a sworn statement that they are not a foreign person. This eliminates the buyer's withholding obligation. Buyers should always obtain this affidavit for any transaction; if the seller cannot provide it or is actually foreign, withholding is mandatory.

How It Affects You

If you are buying U.S. real property from a foreign seller: You — the buyer — are the withholding agent under § 1445. If the seller is a foreign person and no exemption applies, you must withhold 15% of the gross sales price and remit it to the IRS within 20 days of closing. If you fail to withhold, the IRS can collect the unpaid withholding tax from you (the buyer), plus interest and penalties — even though you paid full price to the seller. Always ask the seller for a non-foreign affidavit at closing. If they cannot provide one, engage a tax attorney familiar with FIRPTA before closing. Title companies routinely handle FIRPTA compliance for residential transactions; commercial transactions require more careful professional coordination.

If you are a foreign investor selling U.S. real property: Expect 15% of your gross sales price to be withheld at closing — on a $2 million property, that's $300,000 withheld regardless of your actual gain. Your actual U.S. federal tax on the gain (at U.S. capital gain rates) may be substantially less. To recover the excess, you must file a U.S. tax return (1040NR or 1120-F), report the actual gain, and claim the withheld amount as a credit. Refunds can take 6–18 months. If you apply for a withholding certificate before closing (Form 8288-B), the IRS may authorize reduced withholding — but the application process takes 90+ days. Plan ahead: start the withholding certificate application 3–4 months before your expected closing date.

If you are a foreign investor holding REIT shares: Your exposure to FIRPTA depends on your ownership percentage. If you own less than 10% of a publicly traded REIT's shares, capital gain distributions from the REIT are not FIRPTA income — a critical exemption for diversified foreign REIT investing. If you hold a larger stake, capital gain distributions are subject to FIRPTA rules, and the REIT will withhold 21% on those distributions. Regular REIT dividends attributable to USRPI gains are still subject to withholding even below the 10% threshold — check the REIT's Form 1099-DIV characterization of each distribution.

If you are a qualified foreign pension fund: The PATH Act (2015) created a broad exemption from FIRPTA for "qualified foreign pension funds" (QFPFs) — foreign equivalents of U.S. qualified retirement plans. QFPFs are exempt from FIRPTA on both direct real estate dispositions and REIT distributions attributable to USRPI gains. This exemption has significantly increased direct foreign pension fund investment in U.S. real estate, particularly large commercial properties. Confirm QFPF status with U.S. tax counsel and prepare the documentation required to assert the exemption to withholding agents.

If you are a real estate attorney or closing agent handling an international transaction: FIRPTA compliance is mandatory and the consequences of getting it wrong fall heavily on the buyer/closing agent. Best practice checklist: (1) obtain a non-foreign affidavit from the seller at or before closing; (2) if the seller is or may be foreign, notify the buyer of the withholding obligation immediately; (3) compute 15% of gross proceeds and ensure funds are available at closing; (4) file Form 8288 and 8288-A within 20 days of closing; (5) check whether any exemptions apply (personal residence price thresholds, treaty benefits, withholding certificate); (6) for USRPHC share sales, apply the same analysis to corporate stock dispositions.

State Variations

Several states have their own withholding requirements on real estate sales by nonresidents — layered on top of federal FIRPTA:

• CA: California requires withholding of 3.33% of the gross sales price on sales of California real property by nonresidents (both foreign and domestic nonresidents). California Form 593 governs this withholding. Foreign sellers face both federal FIRPTA (15%) and California withholding (3.33%) simultaneously.
• NY: New York requires withholding on sales of New York real property by foreign corporations and nonresidents. The withholding rate equals the estimated New York tax on the gain, not a fixed percentage of gross proceeds. New York Form TP-584 reports the transaction and estimated tax.
• HI, ME, NM, SC, WV, and others: Many states have their own nonresident withholding requirements that apply independently of federal FIRPTA, typically at 2–8% of the gain or a fixed percentage of gross proceeds. Real estate professionals should verify current state withholding requirements for the specific jurisdiction.
• No-income-tax states (FL, TX, WA, etc.): These states have no state income tax withholding on real estate sales, so federal FIRPTA withholding is the only withholding obligation.

Implementing Regulations

• 26 CFR § 1.897-1 — Taxation of foreign investment in United States real property interests (definitions of USRPI, USRPHC, foreign person; rules for identifying what constitutes a U.S. real property interest)
• 26 CFR § 1.897-2 — United States real property holding corporations (the 50% asset test; look-back period rules; regularly traded stock exception)
• 26 CFR § 1.1445-1 — Withholding on dispositions of United States real property interests by foreign persons (general withholding rules; 20-day remittance deadline; Form 8288 filing requirements)
• 26 CFR § 1.1445-2 — Situations in which withholding is not required (non-foreign affidavit rules; buyer's personal residence exemption; publicly traded exception; withholding certificate rules)
• 26 CFR § 1.1445-6 — Adjustments of withholding to reflect payments for personal services (allocating amount realized between real property and other components)

Pending Legislation

• FIRPTA reform for institutional investors: Periodic proposals would expand the FIRPTA exemption for foreign pension funds and sovereign wealth funds investing in U.S. real estate, increasing foreign capital flow into commercial real estate — particularly affordable housing and infrastructure.
• Withholding rate modernization: The 15% withholding rate (raised from 10% in 2016 for transactions over $1 million) is occasionally proposed for further adjustment. Some proposals would tie the withholding rate to the estimated gain rather than the gross price, reducing overcollection and refund wait times.
• REIT threshold adjustments: The 10% REIT ownership threshold for the capital gain distribution exemption has been debated — proposals would raise it (to encourage more foreign REIT investment) or lower it (to increase FIRPTA tax collection from large foreign REIT shareholders).

Recent Developments

• PATH Act QFPF exemption — ongoing implementation: The 2015 PATH Act exemption for qualified foreign pension funds continues to be implemented through IRS guidance. Treasury finalized regulations in 2023 clarifying the definition of QFPF and the documentation requirements withholding agents must collect. The exemption has materially increased direct investment by Canadian, Dutch, Australian, and Nordic pension funds in U.S. commercial real estate.
• IRS enforcement focus on USRPHC transactions: The IRS has increased scrutiny of FIRPTA compliance in corporate share sale transactions, particularly where foreign sellers dispose of shares in entities that may qualify as USRPHCs. Many sellers and buyers in closely held real estate holding company transactions fail to analyze whether the entity is a USRPHC before closing.
• OBBBA REIT/FIRPTA provisions (2025): The One Big Beautiful Bill Act included provisions modifying FIRPTA rules for REIT distributions to foreign shareholders, intended to encourage more foreign capital into U.S. real estate through REIT structures by increasing the ownership percentage threshold for the REIT capital gain distribution exemption.
• Extended IRS refund timelines: Foreign sellers awaiting FIRPTA withholding refunds have experienced processing times of 12–24 months as IRS staffing constraints lengthened refund processing. Sellers with expected refunds should file U.S. tax returns as early as possible and consider applying for withholding certificates before closing to reduce initial withholding amounts.