Pacific Rim families closing on Pacific Northwest property tend to discover FIRPTA the same way: a week before closing, when the title company sends a one-page summary that uses the word "withholding" four times. By then the cleanest path has already passed. Here is what that cleanest path looks like, and where it tends to go wrong.
The fifteen percent rule
FIRPTA (the Foreign Investment in Real Property Tax Act) requires that when a foreign seller transfers a U.S. real property interest, the buyer withholds fifteen percent of the gross sale price and forwards it to the IRS. The seller then claims the withheld amount as a credit on a U.S. tax return, but the cash sits with Treasury for the months in between. If the buyer fails to withhold, the buyer becomes personally liable for the tax. The rule is straightforward. The work is everything that sits around it.
For most of the foreign-buyer matters we run, the FIRPTA question runs the other direction too. A foreign buyer eventually becomes a foreign seller. The closing strategy on the way in shapes the closing strategy on the way out.
ITIN is the gating item
Almost every foreign buyer and seller needs a U.S. Taxpayer Identification Number, an ITIN. Most do not have one when the conversation starts. The IRS will not process FIRPTA paperwork without it.
A Certified Acceptance Agent (the firm holds the credential) can process the ITIN application without the client mailing original passports to Austin, Texas. The application still takes the IRS six to nine weeks to adjudicate. That is the binding constraint on most foreign-investor closings. Engage counsel before the LOI is signed and the ITIN clock runs in parallel with diligence. Engage counsel after the purchase and sale agreement and the ITIN clock becomes the critical path.
The withholding certificate is often worth filing
Fifteen percent of gross is more than the actual U.S. tax on most foreign sellers. When the gain is small, or the property is owner-occupied, or basis is high, the actual tax owed is a fraction of the withheld amount. Form 8288-B (the withholding certificate application) asks the IRS to reduce or eliminate withholding in advance.
The application has to land at the IRS by the date of closing. The IRS can take ninety days to respond, during which the buyer holds the withheld funds in escrow rather than remitting them. For a fifteen-million-dollar sale, that is more than two million dollars sitting in escrow rather than at Treasury for the better part of a quarter. For a family with planned uses for the proceeds, the difference matters.
Where it goes wrong
The most common failure modes, in roughly descending order of how often they show up at our closing table:
- ITIN application filed too late. The seller closes, fifteen percent gets withheld, and the refund process runs eight to fourteen months out.
- Form 8288 filed late. The buyer’s twenty-day deadline after closing is a hard one. Penalties stack quickly.
- Certificate of non-foreign status taken at face value. A U.S. LLC owned by foreign persons is still a foreign seller for FIRPTA purposes. Look-through rules apply.
- Mid-closing entity restructuring. Foreign buyers sometimes try to drop the property into a U.S. LLC the day before closing. The transfer itself can be a FIRPTA event.
