FIRPTA: What title agents need to watch for

FIRPTA issues are easier to manage when they’re identified early. Knowing what to flag, document, and escalate can help prevent unnecessary closing delays.

TL;DR:

• FIRPTA generally requires withholding when a foreign person sells a U.S. real property interest.
• Seller status, entity structure, documentation, and potential exemptions should be addressed early.
• Buyers are generally responsible for withholding, while title agents help facilitate and document the process.
• A consistent checklist can help keep FIRPTA issues from becoming last-minute problems.

FIRPTA may be a federal tax requirement, but for title agents, it can quickly become a closing issue.

Under the Foreign Investment in Real Property Tax Act (FIRPTA), a buyer purchasing U.S. real property from a foreign seller generally must withhold 15% of the amount realized and remit it to the IRS. The amount realized can include cash, other property transferred, and liabilities assumed or taken subject to. The withholding is not the seller’s final tax bill, but an advance payment toward taxes that may ultimately be owed.

The challenge is often not understanding that basic rule. It’s identifying when FIRPTA may apply early enough to gather the right documentation and keep the transaction moving.

Identify potential FIRPTA transactions early.

Determine early whether the seller may be considered a foreign person under FIRPTA—not days before closing.

Pay particular attention when the seller is an LLC. For federal income-tax purposes, a domestic single-member LLC is generally treated as a disregarded entity unless it has elected to be taxed as a corporation. In that case, FIRPTA analysis may depend on the status of the LLC’s owner. If that owner is a foreign person, withholding requirements may apply.

Be sure to flag missing taxpayer identification numbers, questions about residency status, or sellers who expect to qualify for reduced withholding or an exemption.

Recognize when additional documentation or professional guidance may be needed.

Don’t assume an exemption applies.

Several circumstances can reduce or eliminate FIRPTA withholding, including certification that the seller is not a foreign person, certain residential transactions, and an IRS withholding certificate.

But exceptions depend on specific requirements and documentation.

For example, qualifying buyers may elect no withholding when purchasing a residence for $300,000 or less, while a reduced 10% rate may apply to certain residential purchases above $300,000 and up to $1 million. First American guidance recommends obtaining written direction from the buyer when anything other than the standard withholding amount is used.

Timing matters, too. Sellers seeking an IRS withholding certificate should begin the process early. If the seller intends to rely on a pending application at closing, the title or settlement agent should obtain satisfactory evidence that the application was submitted to the IRS on or before the date of transfer. The applicable FIRPTA amount should still be withheld at closing and held pending the IRS determination. Once the IRS issues the withholding certificate or notice of denial, the amount required by the IRS must generally be reported and remitted within 20 days.

Know where the title agent’s role ends.

The seller is responsible for their tax obligations, while the buyer is generally responsible for withholding the appropriate amount.

Title and settlement professionals may help gather documentation, handle funds, prepare forms, and facilitate payment. But questions about tax status, liability, or eligibility for an exemption should be referred to the appropriate tax or legal professional.

Ordinarily, Form 8288 and Forms 8288-A, together with the withheld funds, are due by the 20th day after the transfer. When a timely withholding-certificate application remains pending at closing, the withholding is still made, but payment and reporting can be deferred until the IRS acts, with payment then generally due within 20 days after the IRS mails the certificate or denial.

A practical FIRPTA checklist for title agents

Identify early whether the seller may be considered a foreign person under FIRPTA.

Review entity structure, particularly single-member LLCs.

Confirm required certifications and TIN information.

Flag potential exemptions or reduced withholding well before closing.

Obtain written buyer direction when standard withholding does not apply.

Track applicable post-closing filing and payment deadlines.

Refer tax and legal questions to the appropriate professionals.

Escalate underwriting or procedural questions when needed.

Retain the seller’s certification of nonforeign status and supporting FIRPTA documentation in the closing file for the required retention period.

Watch for inconsistencies between the certification of nonforeign status and other information in the file. IRS guidance says the certification is ineffective if the transferee or qualified substitute has actual knowledge that it is false, and there can be liability implications where an agent or qualified substitute knows a certification is false and fails to notify the buyer.

Early FIRPTA identification, clear documentation, and an understanding of each party’s role can help title agents keep your transactions on track.

For additional FIRPTA guidance and other educational resources, access AgentNet® Knowledge.

Have questions about underwriting or closing considerations involving FIRPTA? Connect with a First American underwriting expert.