The Foreign Investment in Real Property Tax Act (FIRPTA) makes sure the IRS collects tax when a foreign person sells U.S. real property. In the Valley, that often means owners in Mexico or elsewhere abroad selling a McAllen home, a Mission lot or a South Padre Island condo. Plan before you list, and less of your money waits on the IRS.
Who counts as a foreign person
A foreign person includes a nonresident alien individual and certain foreign corporations, partnerships, trusts and estates. U.S. citizens and lawful permanent residents (green card holders) are not, and someone who meets the IRS substantial presence test may be treated as a U.S. resident for tax purposes.
If you are not a foreign person, you usually sign a certification of non-foreign status at closing, and no withholding applies.
Withholding rates
| Situation | Withholding |
|---|---|
| Individual buyer will use the property as a residence, and the amount realized is $300,000 or less | 0% (exempt) |
| Individual buyer will use the property as a residence, and the amount realized is more than $300,000 but not more than $1,000,000 | 10% |
| All other sales, including any sale over $1,000,000 or a buyer who will not live in the property | 15% |
The reduced rates depend on the buyer, not the seller. The buyer (or a member of the buyer's family) must have definite plans to live in the property at least half the days it is used during each of the first two 12-month periods after the sale. Buyers usually sign a statement to that effect and carry the risk if it proves false.
A hypothetical: on a $400,000 sale to a buyer who will live in the home, withholding is 10 percent, or $40,000. If that buyer were investing, it would be 15 percent, or $60,000. Run your numbers with the FIRPTA calculator.
How it works at a Texas closing
The title company acts as escrow agent and closes the sale. The usual sequence:
- Early on, the title company asks each seller to confirm whether they are a foreign person.
- At closing, the withholding is held back from the seller's proceeds.
- The buyer, often through the title company, files Forms 8288 and 8288-A and pays the withheld amount to the IRS within 20 days of the transfer.
- The IRS sends the seller a stamped copy of Form 8288-A to claim credit on a U.S. tax return. This requires the seller's U.S. taxpayer identification number.
The buyer can be liable if tax is not withheld, so buyers and lenders take FIRPTA seriously. Raise it early to avoid a closing-table scramble.
Reduce withholding with Form 8288-B
If your actual tax will be lower than the required withholding (say, a small gain or a loss), you can apply to the IRS for a withholding certificate on Form 8288-B. The IRS can authorize reduced withholding or none at all.
Timing matters. If the application is submitted by closing, the withheld amount generally stays with the escrow agent until the IRS acts on it. Review takes time, so start when you list, not when you sign a contract. The application requires a taxpayer identification number; if you lack one, apply for an ITIN at the same time.
After the sale: file your return
Report the sale on a U.S. federal return for the year of the sale (individuals generally file Form 1040-NR) and pay tax on your actual gain. If more was withheld than you owe, the IRS refunds the difference. Texas has no state income tax, so there is no Texas return for the gain. Keep records of your purchase price, closing costs and improvements: they set your basis and can reduce your taxable gain.
Planning checklist for foreign sellers
- Talk with a cross-border tax professional before you list.
- Get or renew an ITIN if you lack a U.S. taxpayer identification number.
- Gather your original closing statement and improvement receipts.
- Decide whether to apply for a withholding certificate on Form 8288-B.
- Tell your agent and the title company early that FIRPTA applies.
- Closing from abroad? Ask the title company about mail-away signing and whether documents need notarization at a U.S. consulate or an apostille.
How I help
I raise FIRPTA at our first meeting, build withholding into your net sheet, and coordinate with the title company and your tax advisor so the closing date holds. Hablo español. Book a call to map your timeline, or read my guide to selling your home in the RGV.
