FIRPTA: Foreign Seller Withholding on Manhattan Real Estate

Guides · Taxes & Closing Costs

FIRPTA — the Foreign Investment in Real Property Tax Act of 1980, codified at IRC §§1445 and 897 — is the rule that requires a buyer of US real estate from a foreign person to withhold a portion of the gross sale price at closing and remit it to the IRS. The withholding rate is typically 15% of gross sale price, dropping to 10% or 0% in specific buyer-use-case scenarios. The structural consequence: a non-resident-alien seller of a $5M Manhattan condo is looking at $750,000 withheld at closing — not as the actual tax owed (which depends on the gain and other factors), but as a federal advance payment against eventual tax that the seller can reclaim through a refund process after filing a US tax return. FIRPTA is a buyer-side responsibility but a seller-side cash-flow problem, and getting the mechanics right before closing is one of the single most consequential pieces of foreign-seller transaction planning.

Key takeaways:

• The withholding is not the actual tax — it's a prepayment against eventual tax. FIRPTA withholding is calculated on gross sale price (not gain) and remitted to the IRS at closing. The actual federal tax owed is calculated on the capital gain when the seller files a US tax return. If withholding exceeds tax, the excess is refunded — but refunds typically take 6-12 months and the cash is effectively frozen in the interim.
• The buyer is the withholding agent. Buyer is legally responsible for withholding and remitting, not the seller. Failure to withhold makes the buyer personally liable for the tax. Most Manhattan transactions involving a foreign seller route the FIRPTA mechanics through the closing agent and the buyer's attorney; due diligence on seller status is the buyer's responsibility.
• Form 8288-B can reduce withholding before closing — but it requires substantial advance work. Foreign sellers who expect the actual tax owed to be substantially less than 15% of gross sale price can apply for a reduced or zero withholding certificate. The application must be filed with the IRS before closing, and the IRS typically takes 90 days to process. Sellers who plan FIRPTA reduction at the last minute typically end up with the full 15% withheld.

What FIRPTA is and why it exists

Before 1980, the United States generally did not tax non-resident aliens or foreign corporations on US-source capital gains. The result: foreign investors could purchase US real estate, sell it appreciated, and pay no US federal tax on the gain. Congress closed the gap with the Foreign Investment in Real Property Tax Act in 1980, which deems gain on the disposition of a "US real property interest" to be effectively connected with a US trade or business — making it taxable at standard federal rates.

The withholding mechanic — codified at IRC §1445 — exists because the IRS recognized the practical reality that a foreign seller who closes a sale, takes the proceeds, and returns home is hard to collect from. Withholding at the source ensures the federal government has the funds in hand before the seller can repatriate them. The seller can later prove the actual tax owed is less and claim a refund.

In practice, FIRPTA is administered through Forms 8288 (withholding return filed by the buyer), 8288-A (statement to the foreign seller documenting the withholding), and 8288-B (application for reduced or zero withholding certificate, filed before closing).

Who is a "foreign person" for FIRPTA purposes

FIRPTA withholding is triggered when the seller is a "foreign person." The definition covers:

Non-resident aliens (NRAs). Individuals who are not US citizens and do not meet the IRS's substantial presence test for residency. The substantial presence test is 183 days in the current year OR a weighted calculation across the current and prior two years.

Foreign corporations. A corporation organized under the laws of any country other than the United States or under the laws of any US state. Exceptions exist for foreign corporations that have validly elected to be treated as US corporations for FIRPTA purposes (a "§897(i) election").

Foreign partnerships. Partnerships in which a substantial portion of partners are foreign persons. The analysis can be complex; in practice, any partnership with foreign partners should be evaluated carefully.

Foreign trusts and estates. Trusts and estates that are not "US persons" under the tax code's definitions.

Disregarded entities. A single-member LLC owned by a foreign person is generally disregarded for tax purposes, meaning the foreign owner — not the LLC — is the seller for FIRPTA purposes. However, an LLC that has elected corporate treatment may be subject to corporate FIRPTA rules instead.

The buyer's responsibility: obtain a sworn affidavit from the seller establishing US-person status if the seller claims to be a US person. The Affidavit of Non-Foreign Status (sometimes called a "FIRPTA Affidavit") is the standard document. If the seller cannot provide it, the buyer must withhold.

A common edge case: a green-card holder (lawful permanent resident) is a "US person" for FIRPTA purposes regardless of where they actually live. A green-card holder selling a Manhattan apartment from abroad is not subject to FIRPTA withholding. By contrast, a high-net-worth individual on a long-stay visa who hasn't yet obtained a green card likely is a non-resident alien for FIRPTA purposes even if they've been physically present in the United States for years.

The withholding rates: 0%, 10%, 15%

FIRPTA applies three different rates depending on the sale price and the buyer's intended use:

0% withholding — sale price under $300,000 AND buyer intends primary residence. If both conditions are met, no FIRPTA withholding is required. The buyer's primary-residence intent is determined by whether the buyer will live in the apartment for at least 50% of the days the apartment is used during each of the two 12-month periods following the closing. The buyer must execute an affidavit attesting to primary-residence intent.

10% withholding — sale price $300,000 to $1,000,000 AND buyer intends primary residence. The reduced 10% rate applies in this band when the buyer's primary-residence intent is established and documented. Without the primary-residence buyer, the rate jumps to 15%.

15% withholding — sale price above $1,000,000 (regardless of buyer use), OR any sale where buyer is not committing to primary residence. The default FIRPTA rate. For most Manhattan transactions — where sale prices regularly exceed $1M — this is the operative rate even when the buyer is a primary-residence purchaser.

The withholding base is gross sale price — not the gain, not the equity proceeds. A $5M sale with a $4M mortgage payoff still produces $750,000 of FIRPTA withholding (15% × $5M). The withholding can easily exceed the seller's actual cash proceeds at closing in heavily-financed scenarios — the seller may need to bring cash to the closing to cover the withholding from non-sale funds.

The mechanics: how withholding actually works at closing

The FIRPTA withholding flows through the closing process as follows:

1. Seller status determination. The buyer's attorney requests a sworn affidavit of the seller's tax status. If the seller is a US person, the affidavit establishes that and no withholding is required. If the seller is a foreign person, the FIRPTA withholding obligation activates.

2. Withholding calculation. Determined by sale price + buyer's intended use as described above. For most Manhattan transactions, 15% of gross sale price.

3. Withholding at closing. The withheld amount is held back from the seller's closing proceeds. The closing agent (typically the title company in a condo deal, the transfer agent or attorney in a co-op deal) maintains the funds in escrow.

4. Remittance to IRS via Form 8288 + 8288-A. The buyer (or the closing agent acting on the buyer's behalf) must remit the withholding to the IRS within 20 days of closing. Form 8288 is the buyer's withholding return; Form 8288-A is the per-seller statement provided to the seller documenting the amount withheld.

5. Seller receives copy of 8288-A. The seller uses this form to claim credit for the withholding on the seller's eventual US tax return (Form 1040-NR for non-resident-alien individuals; Form 1120-F for foreign corporations; etc.).

6. Seller files US tax return. The actual federal tax owed is calculated on the gain (sale price minus selling costs minus basis), using the standard federal capital gains rates. The withholding from step 4 is applied as a prepayment.

7. Refund or balance due. If actual tax owed is less than the withholding, the seller claims a refund. If actual tax owed exceeds the withholding, the seller pays the balance.

In practice, for most Manhattan foreign-seller transactions, the FIRPTA withholding substantially exceeds the actual federal tax owed. A foreign seller with a $5M sale price, $4M cost basis, and $400K selling costs has a $600K capital gain — federal tax at 20% LTCG + 3.8% NIIT is approximately $143K, while the FIRPTA withholding is $750K. The $607K excess is recoverable as a refund, but the refund process takes time.

Buyer-side responsibility

FIRPTA is structured as a buyer-side obligation. The buyer (not the seller) is legally responsible for withholding and remitting. Buyers who fail to withhold can be held personally liable for the tax that should have been withheld, plus interest and penalties.

In practice, the buyer's attorney and the closing agent administer FIRPTA on the buyer's behalf. The buyer's responsibility is to ensure due diligence on seller status — which generally means obtaining the seller's Affidavit of Non-Foreign Status (or the alternative, accepting the withholding obligation if the seller is foreign).

A consequential point: in a co-op transfer, the FIRPTA mechanics still apply. While the co-op structure means the underlying conveyance is shares of a corporation plus a proprietary lease (rather than a deed for real property), the IRS treats co-op shares as US real property interests for FIRPTA purposes. Co-op closing agents handle FIRPTA withholding the same way condo closing agents do.

For most Manhattan buyers, the FIRPTA process is invisible — the buyer's attorney handles it. The seller's experience is the more substantive: the withholding hits the seller's closing-proceeds calculation, and managing the cash flow around it requires planning.

Reduced or zero withholding: Form 8288-B

Foreign sellers who expect their actual federal tax to be substantially less than the FIRPTA withholding can apply for a reduced or zero withholding certificate from the IRS using Form 8288-B (Application for Withholding Certificate). The certificate, if granted, allows the closing to proceed with reduced or zero withholding — meaning the seller receives more of their proceeds at closing rather than waiting for a refund.

When to apply. Best practice: file Form 8288-B at least 90 days before the expected closing date. The IRS processes applications in approximately 90 days; faster processing is possible only in unusual circumstances. Sellers who plan FIRPTA reduction less than 90 days before closing usually end up with the full 15% withheld and recover the excess later through the refund process.

What gets approved. The IRS generally approves Form 8288-B applications when the seller can demonstrate that the actual federal tax owed will be less than the standard withholding. The application requires the seller to substantiate:

• Cost basis (purchase price + acquisition costs + capital improvements)
• Expected sale price
• Expected gain
• Expected federal tax owed
• The withholding amount that would apply
• The reduced withholding amount being requested

Practical economics. For a foreign seller of a Manhattan apartment with substantial documented basis (long-term hold, well-documented capital improvements), the actual tax owed is typically much less than 15% of gross sale price. The Form 8288-B process can reduce the closing-day cash hold from 15% to perhaps 5%-10% — saving the seller $300,000 to $500,000 of upfront cash on a $5M transaction.

Coordination with the buyer. The buyer's attorney must be aware that a Form 8288-B is pending. The closing typically proceeds with the closing agent holding the standard 15% in escrow pending IRS issuance of the certificate; once the certificate is issued, the excess is released to the seller. This timing coordination is where most FIRPTA reduction transactions get stuck.

What gets withheld vs what tax is actually owed

The withholding is on gross sale price. The actual federal tax is on the capital gain. These two numbers are very different.

Example: foreign seller, long-term holding, no Section 121.

• Sale price: $5,000,000
• Cost basis: $4,000,000 (purchase + acquisition + improvements)
• Selling costs: $400,000
• Amount realized: $4,600,000
• Capital gain: $600,000
• Federal LTCG at 20%: $120,000
• NIIT 3.8%: $22,800
• Federal tax: $142,800

The FIRPTA withholding at 15% of $5,000,000 = $750,000.

The actual federal tax owed = $142,800.

Excess withholding (refundable): $607,200.

The seller is owed $607,200 in refund after filing the US tax return. The refund typically arrives 6-12 months after filing — meaning the cash is effectively frozen for that period.

This is the structural pain point of FIRPTA. Even for sellers with relatively modest gains, the withholding far exceeds the actual tax owed, and the recovery process takes time.

The refund process after filing US tax returns

For a non-resident-alien seller, the refund process follows this sequence:

1. Apply for an Individual Taxpayer Identification Number (ITIN). Foreign sellers without a US Social Security Number need an ITIN to file a US tax return. The ITIN application (Form W-7) typically takes 6-11 weeks to process. Apply before closing if possible to avoid delays.

2. File the US federal tax return. For an individual, Form 1040-NR (US Nonresident Alien Income Tax Return). The return reports the sale, calculates the capital gain, computes the actual federal tax, and claims credit for the FIRPTA withholding.

3. Claim the refund. Any excess of withholding over actual tax is claimed as a refund on the return. The IRS typically processes the refund in 3-6 months after return filing. For substantial refunds, the process can extend longer.

4. Coordinate state-level filings. New York State (and NYC if applicable) requires separate state-level returns. The state-level capital gains tax is owed in addition to federal — and is not covered by FIRPTA withholding (which is federal only). Sellers should plan for separate state-level tax obligations.

5. Foreign tax credit coordination. Sellers in countries with US tax treaties may be eligible for foreign tax credits in their home country covering some or all of the US tax paid. The mechanics depend on the specific bilateral treaty and the seller's home-country tax framework.

US estate tax for non-resident sellers

A separate consideration for foreign owners of US real estate: US estate tax. Non-resident aliens who die owning US real estate are subject to US estate tax on the property's value, with a federal estate-tax exemption of only $60,000 — far below the $13.99M exemption available to US citizens and residents. The estate-tax rates are progressive up to 40%.

For a foreign individual owning a $5M Manhattan apartment, the potential US estate tax exposure at death exceeds $1.9M unless mitigated through:

• A US tax treaty with the owner's home country (some treaties provide larger exemptions)
• Ownership through a foreign corporation (US estate tax does not apply to shares of a foreign corporation owning US property — though FIRPTA and other rules still apply)
• Other structured ownership arrangements

This is a key planning consideration for foreign Manhattan buyers, but it's outside the scope of the sale-side FIRPTA framework. The interaction with FIRPTA matters because a foreign individual planning a sale during life avoids the estate tax exposure entirely — and the FIRPTA-driven federal tax + state tax + NYC tax on the gain is generally substantially less than the eventual estate tax would be.

NY State + NYC tax (in addition to FIRPTA)

FIRPTA is federal. New York State and New York City taxes apply separately and are not covered by FIRPTA withholding.

NY State. NY State taxes the capital gain at ordinary income rates (4% to 10.9%). For a foreign seller, the gain is sourced to New York (where the property is located), and NY State withholding may apply at closing under IT-2663 (Nonresident Real Property Estimated Income Tax Payment Form). The IT-2663 estimated payment is typically 10.9% of the estimated gain — not gross sale price, which is a meaningful distinction from FIRPTA.

NYC. A foreign individual selling Manhattan real estate is generally not a NYC resident for income tax purposes (unless they meet domicile + days-present residency tests). NYC resident income tax does not apply. However, NYC's transfer tax (1.0% under $500K; 1.425% at $500K+) is paid by the seller as a closing cost — same as for any seller.

The combined federal + NY State withholding at closing for a foreign seller typically reaches approximately 25% of gross sale price (15% FIRPTA + 10.9% IT-2663), creating a substantial cash-flow drag. Sellers who use Form 8288-B for federal reduction should consider parallel state-level filings to reduce IT-2663 if appropriate.

Practical pre-closing checklist for foreign sellers

For a foreign seller planning a Manhattan sale, the FIRPTA-related pre-closing checklist runs roughly as follows:

90+ days before closing:

• Confirm seller status (NRA, foreign corp, foreign trust, etc.)
• Apply for ITIN if seller doesn't already have one (Form W-7)
• Begin compiling cost basis documentation — original purchase records, acquisition cost receipts, capital improvement substantiation
• If FIRPTA reduction is desired, file Form 8288-B with the IRS

60 days before closing:

• Confirm Form 8288-B status if applied
• Coordinate with buyer's attorney on FIRPTA mechanics and closing-day flow
• Engage a US-tax-experienced CPA if not already

30 days before closing:

• Confirm 8288-B certificate status; adjust closing structure if certificate not yet issued
• Review estimated capital gain calculation and confirm withholding amount
• Prepare for parallel NY State IT-2663 filing

Closing day:

• FIRPTA withholding held back from proceeds
• IT-2663 estimated payment held back from proceeds (if applicable)
• Closing agent files Forms 8288 + 8288-A within 20 days
• Seller receives 8288-A copy for tax-return preparation

Post-closing:

• File US federal tax return (Form 1040-NR or applicable)
• File NY State nonresident return (IT-203)
• Claim refunds where applicable
• Coordinate with home-country tax filing for treaty credits

What this means for buyers

Buyers purchasing from a foreign seller take on the FIRPTA withholding obligation. The mechanics are routine for experienced closing agents and shouldn't materially affect the buyer's closing-day experience. The substantive buyer-side consideration: the FIRPTA withholding reduces the seller's net proceeds at closing, which may indirectly affect negotiating dynamics — a seller who needs $X of net proceeds to clear the transaction may price differently when 15% of gross is being held back than in a US-seller scenario.

For a US buyer, working with a foreign seller on a Manhattan transaction is operationally similar to any other transaction. The key item: confirm seller status, secure the Affidavit of Non-Foreign Status (or activate FIRPTA withholding if foreign), and ensure the closing agent's FIRPTA paperwork is complete before disbursement.

What this means for foreign sellers

For a foreign owner of Manhattan real estate considering a sale, the FIRPTA framework adds a layer of pre-closing planning that US-resident sellers don't face. The structural reality:

The 15% withholding is real cash flow. Plan for it. The withholding is from gross sale price, not gain. On a $5M sale, that's $750K of cash effectively frozen for 6-12 months pending refund.

Form 8288-B can substantially reduce the cash impact if filed early enough. 90+ days before closing is the minimum lead time. Sellers who plan in advance can often reduce withholding to closer to actual tax owed — meaning much less cash held back.

Cost basis documentation is the foundation of everything. The basis substantiation that the IRS requires for Form 8288-B and for the eventual tax return is the same substantiation that determines the actual tax owed. Get it organized early; it's the highest-leverage piece of pre-closing tax prep.

Coordinate with a US-tax-experienced CPA. The FIRPTA process intersects with US federal tax, NY State tax, NYC transfer tax, ITIN application, and the seller's home-country tax framework. The coordination is more than a US-resident seller typically needs and warrants engaged tax counsel.

Related resources

• Foreign-Buyer Manhattan Guide — the pillar guide on foreign-national Manhattan transactions (buy side)
• NYC Capital Gains Tax Calculator — model the federal + NY State + NYC tax on the gain (the calculator does not separately model FIRPTA withholding mechanics, but the resulting tax is what the FIRPTA withholding is a prepayment against)
• Capital Gains Tax on a Manhattan Apartment Sale — the methodology guide for the underlying federal + state + city tax stack
• The Foreign Buyer's Guide to Manhattan — the earlier sub-guide on foreign-buyer transactions
• NYC Closing Costs: The Full Stack — the closing-cost framework for any Manhattan sale

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This guide reflects current FIRPTA rules under IRC §§1445 and 897 as administered by the IRS, and current NY State withholding rules under IT-2663. FIRPTA implementation involves complex factual determinations — seller status, withholding calculation, certificate eligibility — that require careful CPA review on the specific facts of any transaction. The Roebling Team at Compass does not provide tax or legal advice and recommends engaging a US-tax-experienced CPA and a US real estate attorney for any foreign-seller transaction. © 2026 The Roebling Team at Compass.