FIRPTA Withholding Explained: Why the Buyer Is on the Hook

A Canadian sells a $600,000 condo. The IRS's first claim on that deal is $90,000, and if it isn't set aside at closing, the person the IRS chases for it is not the seller. It's the buyer.

That is FIRPTA in one sentence, and it is the reason a rule almost nobody at the closing table has read can quietly detonate an otherwise clean deal. FIRPTA, the Foreign Investment in Real Property Tax Act, sits in Internal Revenue Code §1445. It says that when a foreign person disposes of a "U.S. real property interest," the transferee (the buyer) must withhold a slice of the purchase price and remit it to the IRS. Not the seller. The buyer. And §1445(a) makes that buyer personally liable for the tax if the withholding is missed.

So this is the rare tax rule that can blow up the closing for the person on the other side of the table. If you're representing US or Canadian buyers picking up property from a foreign seller, this is your problem whether you like it or not, and the most useful thing you can do for a foreign seller is get a Form 8288-B filed before the ink dries.

Let me walk through how it actually works, where the trap is, and the one filing that solves most of the pain.

What is FIRPTA and who does it apply to?

FIRPTA is a US tax-collection mechanism, enacted in 1980, that makes sure foreign persons pay US tax on gains from selling US real property. It applies whenever a "foreign person" disposes of a "U.S. real property interest" (USRPI) under §897 and §1445.

The mechanics live in §1445. The definitions live in §897. The two pieces you need:

• A foreign person is a nonresident alien individual, a foreign corporation, a foreign partnership, trust, or estate. A US citizen or a resident alien (green-card holder or someone who meets the substantial-presence test) is not a foreign person for this purpose. A Canadian snowbird who hasn't crossed the residency line is foreign.
• A U.S. real property interest is, in plain terms, direct ownership of US real estate (land, a building, a condo) plus interests in certain US corporations that mostly hold US real estate. For most closings, it's just the house or the condo.

The key mental shift: FIRPTA is not a tax. It's a withholding rule. It's a deposit against a tax bill that gets sorted out later on the seller's US return. Keep that frame, because the amount withheld and the amount actually owed are frequently nowhere near each other.

Why is the buyer responsible for FIRPTA withholding?

Because the seller is foreign, and the IRS can't easily chase a nonresident across a border after the money has left the country. So §1445 puts the collection duty on the party who is standing on US soil with the cash: the buyer.

Under §1445(a), the transferee "shall be required to deduct and withhold" from the amount realized. If the buyer doesn't, the buyer becomes liable for the tax that should have been withheld, plus interest and penalties. That liability is real and it is personal. It doesn't evaporate because the buyer "didn't know the seller was foreign."

In practice, the withholding gets handled at the closing table by whoever is running the settlement: a title company or closing attorney in the US, a notario in Mexico coordinating a US-side closing agent. The buyer is legally the withholding agent, but the closing professional is who actually holds back the funds and files the paperwork. That's why closing firms need to understand this cold: you are executing the buyer's legal duty, and if it's botched, it's your client who eats the exposure.

Many buyers arrive assuming a foreign seller's tax is "the seller's problem." That assumption is exactly backwards. Until the withholding is remitted or a certificate reduces it, it is squarely the buyer's problem.

How much is FIRPTA withholding, and 15% of what, exactly?

The standard FIRPTA rate is 15% of the gross amount realized (the full sales price) under §1445(a). Not 15% of the gain. Fifteen percent of the entire price.

Read that again, because this is the trap that costs foreign sellers the most.

The withholding is calculated on the gross sales price, with no deduction for the seller's original cost, their improvements, their mortgage payoff, or their selling costs. A seller with a razor-thin margin, someone who bought at the top and is selling flat, can have far more withheld than they will ever owe in actual tax.

There are three tiers to know:

Scenario	Withholding rate	Authority
Default: foreign seller, most sales	15% of gross price	§1445(a)
Sales price $300,001–$1,000,000 and buyer will use it as a residence	10% of gross price	§1445(c)(4)
Sales price ≤ $300,000 and buyer will use it as a residence	0% (exempt)	§1445(b)(5); Reg. §1.1445-2(d)(1)

The residence exemptions are narrower than people think. The $300,000 exemption and the 10% reduced rate both require the buyer (or a member of the buyer's family) to have definite plans to reside at the property for at least 50% of the days it's used by any person during each of the first two 12-month periods after the sale. And critically, the buyer has to be willing to sign a statement to that effect and accept the liability that goes with it. No signed residence statement, no reduced rate.

Note also: the $300,000 threshold looks at the price, but the exemption is all-or-nothing on eligibility. It's not a deduction of the first $300,000. A $300,000 residential sale to an owner-occupant can be 0% withholding; a $300,001 sale to the same buyer is 10% on the whole thing.

Can you reduce FIRPTA withholding? The Form 8288-B certificate

Yes, and this is the fix almost nobody files in time. A seller (or the buyer) can apply to the IRS for a withholding certificate on Form 8288-B that sizes the withholding to the seller's actual expected tax instead of the blunt 15% of gross. The authority is §1445(c)(3) and Reg. §1.1445-3.

Form 8288-B asks the IRS to look at the real numbers (purchase price, cost basis, improvements, selling expenses) and calculate what the seller's actual US tax on the gain is likely to be. If the certificate is approved, the buyer withholds only that reduced amount (or nothing, if there's no gain), rather than parking 15% of the gross with the IRS and forcing the seller into a refund cycle.

Here's how the timing works, and why it matters so much:

• File Form 8288-B before or on the date of the transfer. Per the form instructions and Reg. §1.1445-3, if the application is filed by the closing date, the buyer is not required to remit the withholding while the IRS is reviewing it, but the buyer must still hold the funds in escrow until the IRS acts.
• The IRS is directed to act on a complete application generally within 90 days. That's the reason to start early.
• If the certificate comes back reducing the withholding, the escrowed excess is released to the seller. If it's denied or reduced only partway, the correct amount goes to the IRS.

The catch nobody plans for: the seller (and often the buyer) needs a US taxpayer identification number to file. A foreign individual applies for an ITIN on Form W-7. If the seller doesn't have one, that process has to run in parallel or it becomes the bottleneck. In deals I've watched go sideways, it's almost never the 8288-B itself that's late. It's the ITIN nobody started 60 days out.

A worked example: the $600,000 condo problem

Take a Canadian who bought a Florida condo years ago and is now selling to a US buyer for $600,000. (Situs matters here: FIRPTA reaches dispositions of US real property interests. If the same Canadian were selling a condo in Playa del Carmen, that is Mexican real estate, outside §1445 entirely, and governed by Mexican tax rules. Keep the example on US dirt so the math is honest.)

Here's what the standard rule does versus what the seller actually owes:

Line	Amount
Sales price	$600,000
FIRPTA withholding at 15% of gross (§1445(a))	$90,000
Seller's actual cost basis + improvements + selling costs	(say) ~$490,000
Actual taxable gain	~$110,000
Actual US tax on that gain (illustrative, long-term rates)	~$20,000
Cash withheld beyond the real tax	~$70,000

That $70,000 gap is real money that leaves the seller's pocket at closing and doesn't come back until they file a US return for the year of sale and wait out the refund. On a nonresident return, that's typically the following year, and refunds involving withholding certificates and foreign filers are not fast. Call it 12+ months with $70,000 sitting at the IRS earning the seller nothing.

Now run the same deal with a timely Form 8288-B. The IRS reviews the actual gain, approves a certificate sizing the withholding to roughly the true tax, and the buyer releases the escrowed excess to the seller at or shortly after closing. Instead of $90,000 gone for a year, the seller is out roughly the $20,000 they actually owe. Same tax bill at the end of the day, wildly different cash flow.

The tax owed doesn't change. What changes is whether $70,000 of the seller's money is frozen for a year. For a lot of sellers, especially ones rolling the proceeds into another purchase, that frozen cash is the difference between the deal working and not.

What happens if FIRPTA withholding isn't done at closing?

If the buyer fails to withhold and remit, the IRS can collect the tax directly from the buyer, plus interest and penalties. Under §1445 and §6651, the withholding agent is liable for the amount that should have been withheld.

The remittance mechanics: the buyer/withholding agent reports and pays using Form 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests) and Form 8288-A (the statement given to the seller showing the amount withheld, which the seller later uses to claim credit on their return). These are generally due within 20 days of the transfer under Reg. §1.1445-1(c), unless a Form 8288-B application was filed by the closing date, in which case the 20-day clock runs from the day the IRS acts on the certificate.

Penalties for getting this wrong come from the general failure-to-file and failure-to-pay provisions and interest under §6621. The exact figures are date-sensitive and depend on the facts, so I won't quote a rate here. The point is that the exposure lands on the withholding agent, and it compounds.

For closing professionals, the practical failure points I see most:

1. Nobody confirmed the seller's status. The buyer should get a signed certification of non-foreign status (a §1445(b)(2) affidavit) from any seller claiming to be a US person. No affidavit, assume foreign, withhold.
2. The 8288-B was filed late, after closing, so the funds had to be remitted anyway and the "reduction" became a refund claim.
3. The ITIN wasn't started early enough, so the 8288-B couldn't be processed.
4. The residence exemption was assumed without the buyer signing the required residence statement or meeting the price threshold.

Does FIRPTA apply to Canadian and Mexican buyers and sellers?

FIRPTA is a US rule, so it turns on whether US real property is involved and whether the seller is a US person, not on the buyer's nationality. A Canadian buyer purchasing US property from a US seller has no FIRPTA withholding duty (the seller isn't foreign). A Canadian seller of US property triggers it regardless of who's buying.

This is where cross-border closing teams have to be careful about which country's dirt is actually being sold. FIRPTA reaches US real property interests. It does not, by itself, reach a straightforward sale of Mexican real estate between two foreign persons. That's Mexican tax law and the notario's domain, with ISR and the notario's withholding obligations on the Mexican side.

The overlap that matters for firms serving US and Canadian clients:

• A US or Canadian buyer acquiring a US real property interest from a foreign seller: FIRPTA applies, buyer is the withholding agent.
• A Canadian selling a US property: FIRPTA applies, and the Canada–US tax treaty affects how the gain is ultimately taxed and credited, but it does not exempt the seller from §1445 withholding at closing. The treaty sorts out the final tax; the withholding still happens up front.
• A sale of purely Mexican property between foreign persons: not a FIRPTA event; look to Mexican rules.

Because your clients are moving between all of these, the discipline is: identify the situs of the property and the status of the seller before you draft anything. Those two facts determine whether §1445 is even in play.

Why coordinating the 8288-B before closing is the whole game

Here's the part that separates a clean closing from a year of frozen cash: the withholding certificate only helps if it's filed before the deal closes. File Form 8288-B on or before the closing date and the buyer can hold funds in escrow pending the IRS decision instead of shipping 15% of gross to Washington. Miss that window and the "reduction" turns into a refund: same tax, but the seller's cash is gone for a year.

For closing firms, that means the FIRPTA analysis can't be a settlement-day surprise. Build it into intake:

1. Determine seller status first. Foreign or not? Get the non-foreign affidavit or plan for withholding.
2. Start the ITIN early (Form W-7) if the foreign seller doesn't have one. This is the usual bottleneck.
3. Run the real gain math with the seller's basis, improvements, and costs to see whether an 8288-B meaningfully helps. If the seller has a big real gain, the certificate saves little; if the margin is thin, it saves a fortune in frozen cash.
4. File Form 8288-B before the closing date and hold the disputed funds in escrow.
5. Have the escrow instructions and the Forms 8288 / 8288-A queued so the remittance is right whichever way the IRS rules.

The tax bill is fixed by the law and the facts. You're not making it go away. What you're managing is cash and timing, and on a deal with a thin margin that's the entire fight. Get the 8288-B in before closing and you hand your client their money now instead of next year.

FIRPTA outcomes depend on the specific facts, the seller's residency, and the applicable treaty, and none of this is legal advice. A foreign seller's US return and any treaty position should be handled with a qualified US tax preparer, and cross-border structuring questions belong with your attorney.

Sources

• IRC §897: definition of U.S. real property interest and taxation of foreign persons' gains
• IRC §1445: withholding on dispositions of USRPIs; §1445(a) (15% default), §1445(b)(2) (non-foreign affidavit), §1445(b)(5) (residence exemption ≤ $300,000), §1445(c)(3) (withholding certificate), §1445(c)(4) (10% reduced rate for residences up to $1,000,000)
• Treas. Reg. §1.1445-1: general withholding and remittance rules (20-day deadline)
• Treas. Reg. §1.1445-2: non-foreign certifications and the $300,000 residence exemption
• Treas. Reg. §1.1445-3: applications for withholding certificates
• IRC §6621: interest rate on underpayments
• IRC §6651: failure-to-file and failure-to-pay penalties
• Form 8288: U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
• Form 8288-A: Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests
• Form 8288-B: Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests
• Form W-7: Application for IRS Individual Taxpayer Identification Number