FIRPTA and Cross-Border Real Estate: Withholding, Exposure, and Structural Planning

For non-U.S. persons investing in United States real estate, the Foreign Investment in Real Property Tax Act (FIRPTA) introduces a powerful compliance mechanism that operates independently of estate tax rules. In high-value transactions, its implications are immediate and material.nFIRPTA requires that when a foreign person disposes of U.S. real property, the purchaser must withhold 15% of the gross sales price and remit it to the Internal Revenue Service. This withholding applies regardless of actual gain and functions as a prepayment of potential U.S. capital gains tax. Importantly, withholding is imposed on gross proceeds — not net profit.

Who Is Subject to FIRPTA?

FIRPTA applies when:

• The seller is a nonresident alien individual;

• A foreign corporation disposes of U.S. real property;

• A foreign trust or estate sells U.S.-situs real property;

• A U.S. entity is treated as a “U.S. real property holding corporation” (USRPHC).

In estate contexts, exposure arises when:

• A non-U.S. decedent owned U.S. real estate;

• Heirs residing abroad sell inherited U.S. property;

• Foreign holding structures unwind U.S. property interests;

• Cross-border trust structures dispose of U.S. real estate post-death.

Why FIRPTA Matters in High-Net-Worth Planning

For substantial properties, 15% of gross proceeds can represent a significant liquidity constraint. In a $20 million sale, $3 million may be withheld at closing, even if actual tax liability is lower. While refunds are available if withholding exceeds actual tax due, the administrative process can be lengthy. For estates navigating multi-jurisdictional administration, this delay can complicate liquidity planning and asset redistribution.

FIRPTA is therefore not merely a transactional issue. It intersects with:

• Estate administration timing;

• Cross-border liquidity modeling;

• Capital gains exposure post-step-up in basis;

• Entity selection and ownership structure;

• Treaty analysis (where applicable).

Withholding Certificates and Planning Techniques

In certain circumstances, sellers may apply for a withholding certificate to reduce or eliminate withholding where expected tax liability is lower than 15% of gross proceeds.

Advance planning may involve:

• Structuring ownership through appropriate entities;

• Analyzing treaty protections;

• Timing dispositions strategically relative to residency changes;

• Coordinating estate administration to minimize over-withholding.

Because FIRPTA operates independently of estate tax rules, it must be evaluated separately within any cross-border real estate strategy. In globally structured estates, ignoring FIRPTA can result in unnecessary capital constraint at precisely the moment liquidity is most critical.