Understanding FIRPTA: What Foreign Sellers of U.S. Real Estate Must Know

Foreign investors selling U.S. real estate are subject to FIRPTA — and while the law isn’t new, its execution continues to be a friction point for non-resident sellers moving capital out of the country.

Under FIRPTA (Foreign Investment in Real Property Tax Act), the IRS requires a 15% withholding on the gross sale price of U.S. real estate owned by a non-resident. It’s not based on gains, it’s not net proceeds — it’s the full contract price. That’s the part that still catches investors off guard, particularly those accustomed to tax systems that apply withholdings at the realized-gain level.

The withholding is triggered at closing, handled by the buyer or escrow agent, and remitted to the IRS within 20 days. It applies whether the property is held personally, through a foreign corporation, or via a pass-through structure. Unless the seller qualifies for a valid exemption or a pre-approved reduction, the funds are withheld automatically.

What many investors don’t realize until too late is that the 15% can often be reduced or avoided — legally — but only if addressed before closing. The most direct path is via IRS Form 8288-B, which requests a withholding certificate based on the seller’s actual projected tax liability. If approved prior to close, the sale can proceed without the standard FIRPTA holdback. The timeline here matters: once funds are withheld, they stay with the IRS until the seller files a U.S. return to reconcile and request a refund — which can take months.

There are limited exceptions. For example, a sale under $300,000 may be exempt if the buyer intends to use the property as a primary residence. Some bilateral tax treaties reduce effective tax liability, but they don’t override FIRPTA withholding unless properly structured into the transaction. And while some investors use trusts, LLCs, or installment sale structures to navigate around FIRPTA, these approaches only work with precise legal and tax coordination well in advance.

A common issue in practice: local real estate professionals often don’t have deep FIRPTA experience. Title companies may delay closings while navigating the paperwork, and buyers can become liabilities if they fail to withhold properly — the IRS can pursue them directly. For sellers, the result is delayed closings, locked-up capital, or irreversible withholding if the process isn’t controlled.

In states like Arizona, where international ownership is increasingly common — particularly in the Phoenix metro — sophisticated foreign sellers are moving early to address FIRPTA on their terms. Whether liquidating a long-term hold, rebalancing a U.S. portfolio, or preparing for a 1031 exchange into a larger asset, FIRPTA shouldn’t be an afterthought. It’s simply part of the exit math.

The investors who get this right aren’t necessarily paying less tax — they’re avoiding unnecessary delays, optimizing cash flow, and maintaining full control over the disposition process. Those who don’t are often left chasing refunds or explaining to partners why 15% vanished from the wire.

Need help with an Arizona real estate transaction? Contact us for expert guidance.

By Orlando Castillo, MyHomeGroup, Arizona Licensed Realtor

(This article is current as of August 2025. Regulations may change—verify with a professional.)