Understanding FIRPTA: Key Concerns for Buyers and Sellers in U.S. Real Estate Transactions

The Foreign Investment in Real Property Tax Act (FIRPTA) is one of the most commonly misunderstood federal laws affecting real estate transactions. Whether you're buying or selling property in New York, New Jersey, or Pennsylvania, understanding FIRPTA is essential—especially as cross‑border investments continue to rise. At Calvo Law Group, we regularly guide clients through FIRPTA compliance to help avoid unnecessary delays, penalties, or unexpected tax obligations.

What Is FIRPTA?

FIRPTA is a federal tax law requiring buyers to withhold a percentage of the sale price when purchasing U.S. real property from a foreign seller. The idea is simple: ensure the IRS can collect capital gains tax owed by sellers who may not otherwise file a U.S. tax return.

Why Buyers Should Care About FIRPTA

Many buyers assume FIRPTA affects only the seller, but that’s not true. Under the law, the buyer is responsible for withholding and remitting the tax to the IRS. If the buyer fails to do so—even if it was an honest mistake—the IRS can hold the buyer liable for the tax, plus penalties and interest.

Common buyer concerns include:

  • Determining whether the seller is a foreign person. Buyers must obtain and rely on the seller’s certification.
  • Knowing how much to withhold. The standard FIRPTA withholding is 15% of the purchase price.
  • Understanding exceptions. Certain residential purchases under $300,000 may qualify for reduced or no withholding if the buyer intends to use the property as a primary residence.
  • Timely filing. The IRS has strict timelines for submitting the withheld amount and related forms.

Why Sellers Should Pay Attention to FIRPTA

For sellers who qualify as foreign under IRS rules, FIRPTA can significantly impact cash flow at closing. Even if the actual tax owed is far less than the withholding amount, the IRS will not refund the difference until the seller files a U.S. tax return.

Key concerns for sellers include:

  • Large withholding amounts. Withholding is based on the sale price, not the gain.
  • Applying for a withholding certificate. This can reduce or eliminate withholding, but must be submitted promptly.
  • Preparing for delays. A pending withholding certificate does not always prevent withholding at closing.
  • Navigating IRS timelines. Refunds and certificates often take months to process.

How FIRPTA Affects Real Estate Professionals

For real estate agents, attorneys, and lenders, FIRPTA issues can derail an otherwise smooth transaction. Missing documentation, incorrect assumptions, or a misunderstanding of the parties’ obligations can cause delays or post‑closing tax complications.

Steps to Protect Your Transaction

Whether you're buying or selling, it’s wise to consult a real estate attorney familiar with FIRPTA requirements. At Calvo Law Group, we help clients by:

  • Reviewing seller certifications and buyer obligations
  • Coordinating with accountants on withholding certificates
  • Ensuring the correct IRS forms are prepared and submitted
  • Advising on FIRPTA exceptions for residential buyers
  • Keeping closings on track despite withholding requirements

Final Thoughts

FIRPTA doesn't have to be overwhelming, but it does require careful attention. Whether you're a homebuyer, seller, investor, or real estate professional in NY, NJ, or PA, understanding FIRPTA early can prevent costly surprises.

If you have questions about FIRPTA or need support with a real estate transaction, the team at Calvo Law Group is here to help.