FIRPTA on Residential Sales: Why the Buyer Carries the Risk

A buyer closes on a house and, months later, learns they were responsible for withholding a large sum from the seller’s proceeds and sending it to the Internal Revenue Service. They did not, the seller has left the country, and the obligation is now theirs. That is FIRPTA, it applies to ordinary residential sales, and the party it puts at risk is the buyer.

The rule in one paragraph

Under the Foreign Investment in Real Property Tax Act, when a foreign person sells United States real estate, the buyer is generally required to withhold a percentage of the amount realized and remit it to the Internal Revenue Service. The withholding is not the seller’s tax. It is a prepayment against whatever the seller ultimately owes, and the seller reconciles it on a return.

Foreign person means a tax status, not a nationality

The test is the seller’s status for United States tax purposes, not the passport they carry or whether they live abroad. A citizen of another country who is a resident for tax purposes is generally not a foreign person for this rule. Someone who looks entirely local may be.

Which is why the question gets asked of every seller rather than only the ones with a foreign address. Sellers occasionally take offense at being asked. The alternative is a buyer carrying a liability nobody identified.

Rates, exemptions, and why we will not quote them here

Withholding rates vary depending on the amount realized and on how the buyer intends to use the property, and there are exemptions and reductions, including one that can apply to lower priced homes a buyer will use as a residence. There is also a process for applying to reduce the withholding where the seller’s actual tax liability will be less than the standard amount.

Those thresholds and percentages change, and getting one wrong is precisely the failure this article exists to prevent. The specific rate and any available exemption for a transaction belong with a tax professional, and both sides should have one on a FIRPTA file rather than relying on any settlement agent’s summary.

Where it goes wrong

Almost always by being discovered late. A FIRPTA question raised at the start of a file is an administrative task: gather the information, confirm the status, calculate the amount, apply for a reduction if one is available, remit correctly. The same question raised three days before settlement is a crisis, because the application for reduced withholding takes weeks and the seller has usually already planned around receiving the full proceeds.

It also goes wrong when the parties assume that because it is a modest residential sale, the rule cannot apply. It applies to residential sales. The commercial version of this analysis is in FIRPTA on commercial sales, but the underlying obligation is the same.

What it means for the seller’s proceeds

A seller who is a foreign person should understand well before closing that the amount hitting their account will be reduced, potentially substantially, and that recovering the excess means filing a return rather than asking at settlement. Building that into the net proceeds conversation early prevents a very unpleasant closing table.

How we help

We ask the status question at the start of every file rather than the end, coordinate the withholding and remittance where it applies, and make sure both sides know the number well before settlement. We are not tax advisors and we do not determine anyone’s tax status or calculate their liability, so where FIRPTA is in play both parties should have their own tax counsel. What we can do is make sure it is identified in time to handle properly.

Common questions

Does FIRPTA apply to ordinary house sales?

Yes. It is not limited to commercial or investment transactions. It applies whenever a foreign person sells United States real estate, including a single family home.

Who is responsible for withholding?

The buyer. A buyer who fails to withhold when required can be held liable for the amount plus interest and penalties, which is why the question has to be asked on every file.

Who counts as a foreign person?

It is a tax status question rather than a nationality question. Someone who is a resident for United States tax purposes is generally not a foreign person for this rule, regardless of citizenship.

How much has to be withheld?

It depends on the amount realized and on the buyer’s intended use, and exemptions and reductions exist. The rates and thresholds change, so the figure for a specific transaction should come from a tax professional.

Can the withholding be reduced?

There is a process for applying where the seller’s actual liability will be less than the standard withholding. It takes weeks, which is why identifying FIRPTA early rather than at settlement matters so much.

Is the withholding the seller’s final tax?

No. It is a prepayment against whatever the seller ultimately owes. The seller reconciles it by filing a return, and any excess is recovered that way rather than at closing.

This article is general information about FIRPTA withholding on residential sales in Virginia and West Virginia. It is not tax or legal advice. Rates, thresholds, exemptions, and procedures are set by federal law and change, and a settlement agent does not determine tax status or liability. Both parties should engage their own tax counsel.