TL;DR: Foreigners who sell US real estate — or shares in a company that's mostly US real estate — are taxed as if they ran a US business. The buyer withholds 15% of the price.

Normally a foreign investor's capital gain on US assets isn't taxed. Real estate is the big exception. FIRPTA treats gain from a US real property interest (USRPI) as ECI. A USRPI includes land and buildings and also stock in a US real property holding corporation (USRPHC) — broadly, a US corporation whose US real estate is at least 50% of its real estate plus business assets.

To make sure the tax is paid, the buyer withholds 15% of the gross price and sends it to the IRS. The seller then files a return to pay tax on the actual gain and claim back any excess. Key exceptions: qualified foreign pension funds, small stakes in listed companies, and selling shares in a domestically controlled REIT.

FIRPTA withholding on a property saleA foreign fund sells a US building for $50m; the buyer withholds $7.5m for the IRS and pays $42.5m to the seller.Foreign fundsells a buildingUS buyerpays $50mbuilding$50m$7.5mIRS$7.5m (15%)withheld$42.5m$42.5m
15% of the price, not the gain — held back until the seller files.

Worked example

A foreign fund sells a US warehouse for $50m that it bought for $40m. The buyer withholds $7.5m. The fund's actual US tax on the $10m gain is about $2.1m at 21% (plus possibly branch profits tax, depending on structure), so it files a return and claims the difference back.

Where you'll see it: Closing statements, FIRPTA certificates and Forms 8288/8288-A, plus every real estate fund's exit plan.

Code: IRC §§ 897, 1445 · Related: REIT, Domestically controlled REIT, ECI, Blocker

See all 53 terms in the glossary

This glossary is general information, simplified for learning. It is not tax, legal or investment advice, and real structures turn on facts and documents not shown here.