FIRPTA is a cash-flow problem disguised as a tax problem. Once you see it that way, the planning choices become much clearer.

When a foreign person sells U.S. real estate, the Foreign Investment in Real Property Tax Act, Internal Revenue Code §1445, requires the buyer to withhold 15% of the amount realized, which in practice means 15% of the gross sale price, and remit it to the IRS within 20 days of closing.

The difficulty is the base. Withholding is calculated on the price, not the profit. A foreign owner sells a property for $10 million that was bought for $9.5 million:

Amount
Sale price$10,000,000
Gain$500,000
FIRPTA withholding (15% of price)$1,500,000
Approximate federal tax actually owed on the gain~$100,000

The extra $1.4 million is refundable. But it sits at the IRS, interest-free, until the seller files a U.S. return after year-end and the refund is processed, which in our experience takes 9 to 20 months. At any realistic cost of capital, the time-value loss on $1.4 million over that period can exceed the tax itself.

So the question is never "how do we avoid the tax." The tax on a $500,000 gain is modest and the seller will pay it. The question is how to keep $1.4 million working for the seller instead of parked in Washington.

Who FIRPTA reaches

  • Foreign persons selling a U.S. real property interest: non-resident alien individuals, foreign corporations, foreign partnerships and trusts.
  • Buyers are the withholding agents. If the buyer fails to withhold, the buyer is liable for the tax plus penalties and interest. This is why escrow officers and buyers' counsel enforce FIRPTA without exception; asking them to look the other way is a waste of everyone's time.
  • Rate exceptions. Withholding drops to 10% if the price is $1,000,000 or less and the buyer will use the property as a residence, and to 0% if the price is $300,000 or less and the buyer will use it as a residence. Commercial and investment sales are almost always at the full 15%.
  • California adds a second layer: state withholding of 3⅓% of the price (Form 593) on most non-resident sellers, with its own exemptions and its own paperwork.

Three responses

1. Accept the withholding, claim the refund

Let the buyer withhold 15%. After year-end, the seller files Form 1040-NR (individual) or Form 1120-F (foreign corporation), reports the actual gain, and requests the difference back.

Simplest paperwork. No advance planning. No structural risk. The cost is cash frozen for most of two years, plus the requirement that the seller obtain a U.S. taxpayer identification number to file at all.

This is the right answer when the gap between withholding and tax is small, or when the seller did not plan ahead. There is no shame in it.

2. Apply for a withholding certificate, Form 8288-B

Before closing, the seller applies to the IRS for reduced or zero withholding, supported by a calculation of the actual expected tax. If the certificate issues, the buyer withholds only the certified amount.

The cash stays with the seller from day one and the deal structure does not change. The conditions: the seller must already hold a U.S. taxpayer identification number (ITIN or EIN); the application must be complete and filed on or before the closing date; and the IRS aims to respond within 90 days of a complete application but does not promise it. If the certificate has not arrived by closing, the buyer still withholds the full amount and holds it in escrow. The deal calendar and the IRS calendar have to be reconciled early.

For sellers with clean facts and two to three months of lead time, this is the workhorse.

3. Restructure so the seller is a U.S. person: the §351 route

If the property is contributed to a new U.S. C corporation before the sale, the party selling at closing is a U.S. corporation, and §1445 does not apply to U.S. sellers. Federal FIRPTA withholding is 0%. California withholding is generally avoided once the corporation is qualified to do business in the state.

This is the most powerful option and the most demanding. It is also the one most often executed badly.

The §351 route, in the order it must happen

Form NEWCO. A new U.S. corporation, or an LLC electing C-corporation treatment on Form 8832. Allow one to two months for the election, the EIN, and a bank account.

Contribute under §351. The foreign owner contributes the property to NEWCO for 100% of its stock. The contribution is tax-free at the federal level when the transferor group controls at least 80% of the corporation immediately afterward. Because the transferor is foreign and the asset is U.S. real property, a FIRPTA nonrecognition notice must be filed within 20 days of the transfer (Treas. Reg. §1.1445-2(d)(2)). Without it, the contribution itself can trigger withholding.

Let NEWCO be the owner. Title recorded in its name, insurance, utilities, leases, bank account, books. The statute gives no minimum period, which is precisely why the period must be substantive rather than nominal.

NEWCO sells. A U.S. corporation sells to the buyer. No FIRPTA withholding. NEWCO recognizes the gain and pays entity-level tax, roughly 21% federal plus 8.84% California on the gain, not the price. On the $10 million / $500,000 example that is about $150,000 of tax, and the seller keeps the $1.4 million that would otherwise have been parked at the IRS.

Get the cash out. This step is where plans written on a napkin fall apart. A dividend to the foreign shareholder faces 30% withholding, or a lower treaty rate. A liquidation after a fully taxable sale is treated differently: once NEWCO has disposed of all its U.S. real property in taxable transactions, the "cleansing" rule of §897(c)(1)(B) means it is no longer a U.S. real property holding corporation, and the liquidating distribution is generally not a FIRPTA event. This has to be modeled before step one, not discovered after step four.

The risk, and the discipline it demands

The exposure in the §351 route is the step-transaction doctrine. If the IRS can characterize formation, contribution, and sale as one prearranged plan, it can collapse the steps, treat the foreign owner as the seller, and reinstate FIRPTA with penalties.

The defense is discipline, not cleverness:

  • No binding sale contract when the property is contributed. A signed letter of intent is already a warning sign. A purchase agreement is disqualifying.
  • A documented business purpose for NEWCO, written at formation: liability protection, financing, succession planning, operating flexibility.
  • NEWCO behaves like an owner for a meaningful period. It collects rent, pays expenses, files its own returns.
  • Clean §351 records: contribution agreement, stock issuance, basis schedule, and the FIRPTA notice, all dated and on file.

Every item on that list gets checked in an audit. None of them can be manufactured afterward.

The 3× rule

The §351 route is project management executed in strict sequence. A realistic budget includes entity formation and election, the contribution documents and FIRPTA notice, one to two years of corporate returns and franchise tax, the sale, and eventual dissolution, plus professional fees at each step. Our rule of thumb: estimate the visible costs, then double them.

Then compare. If the value of bypassing withholding, meaning the time-value of the over-withheld cash plus any California withholding avoided, does not clear at least three times the all-in fees, keep it simple. Accept the withholding or file Form 8288-B, and claim the refund. The restructuring route earns its complexity only on large sales with low gain and enough lead time.

Which route, in one table

SituationUsual answer
Gain is a large share of price; withholding roughly equals taxAccept and refund
Low gain, 2–3 months before closing, seller has ITIN or EINForm 8288-B
Low gain, high price, 6+ months before any sale discussion, willing to run a corporation§351 route, after the 3× test
Closing in 30 days, no ITIN yetAccept and refund; start the ITIN application today

Questions we hear most

Can't the buyer just agree not to withhold? We know each other. No. The buyer is personally liable for the tax if withholding is skipped without a valid certificate or exemption. Escrow will insist, and they are right to.

My country has a tax treaty with the U.S. Doesn't that reduce FIRPTA? Generally no. FIRPTA gains are taxed as effectively connected income at regular rates, and treaties do not override §897. Treaties matter later, at the dividend stage.

I don't have an ITIN. Can I still file Form 8288-B? The application requires an ITIN or EIN. A Certifying Acceptance Agent can process the ITIN application together with the 8288-B, which saves weeks.

Is the §351 route legal, or is it a loophole? It is expressly contemplated by §351 and the FIRPTA regulations. What is not permitted is a sham: a shell formed the week before a pre-negotiated sale. Substance and timing are the whole difference.

I already have the property in an LLC. Does that help? A single-member LLC owned by a foreign person is disregarded for tax purposes; the foreign owner is still the seller and FIRPTA still applies. The LLC would need to elect C-corporation treatment, and the same timing discipline applies from the date of the election.

What about California? California withholding of 3⅓% has its own forms and exemptions. Solving federal FIRPTA does not automatically solve California, and the two need to be addressed together.

Sources

General information, not tax advice. FIRPTA outcomes turn on specific facts and timing; consult a CPA before contributing property, signing a purchase agreement, or filing a withholding application.