A Malibu seller accepts a strong offer, the buyer completes inspections, and closing appears straightforward. Then the escrow officer asks whether the seller is a foreign person for U.S. tax purposes. That question can change the funds available at closing substantially. When does FIRPTA apply? It applies when a foreign person disposes of a U.S. real property interest, subject to specific exceptions and reduced-withholding rules.
For Los Angeles luxury properties, where sale prices routinely exceed the relevant thresholds, FIRPTA needs to be addressed early rather than treated as a last-minute escrow document. The rule is federal, but the planning is highly practical: it affects the buyer’s obligations, the seller’s closing proceeds, the transaction timeline, and sometimes the structure of a sale or exchange.
What FIRPTA Is and Why Buyers Care
FIRPTA is the Foreign Investment in Real Property Tax Act. Its central purpose is to ensure that foreign sellers pay any U.S. tax due on gain from U.S. real estate. Rather than waiting for a seller to file a tax return after closing, the law generally places a withholding obligation on the buyer, legally called the transferee.
The withholding is not necessarily the seller’s final tax bill. It is a prepayment credited against the seller’s eventual U.S. income tax liability. That distinction matters. A seller may have little taxable gain after considering purchase price, qualifying improvements, selling costs, depreciation, and other tax factors, yet still have a sizable amount withheld at closing if no exception or withholding certificate is in place.
For the buyer, FIRPTA is not optional diligence. If withholding was required and the buyer fails to handle it properly, the buyer can be held liable for the tax, along with potential interest and penalties. In a high-value Beverly Hills, Bel Air, Brentwood, or Santa Monica transaction, that exposure deserves careful attention from the outset.
When Does FIRPTA Apply?
FIRPTA generally applies when both of these facts are true: the seller is a foreign person for FIRPTA purposes, and the asset being sold is a U.S. real property interest.
A U.S. real property interest plainly includes a house, condominium, vacant parcel, commercial building, or investment property located in the United States. It can also include certain interests in domestic corporations that primarily hold U.S. real estate. Most residential transactions involve the direct sale of a property, so the analysis is usually more direct.
A foreign person can include a nonresident alien individual, a foreign corporation, a foreign partnership, a foreign trust, or a foreign estate. Citizenship alone does not answer the question. A non-U.S. citizen who is a U.S. resident for tax purposes is not automatically subject to FIRPTA. Likewise, a green card holder or an individual who meets the substantial presence test may be treated as a U.S. person for federal tax purposes.
This is why sellers should avoid making assumptions based on where they live, the passport they hold, or whether they have filed U.S. tax returns in the past. Their tax advisor should confirm their status before the listing goes live, especially if the property is held through a trust, LLC, partnership, or other entity.
The Standard Withholding Amount
Absent an exception, the buyer generally must withhold 15% of the amount realized on the sale. In a typical arm’s-length residential sale, that is usually the gross contract price, not the seller’s profit.
For example, if a foreign seller sells a Los Angeles residence for $4 million, the default FIRPTA withholding could be $600,000. A seller’s mortgage payoff, broker compensation, renovation costs, and anticipated capital gain do not automatically reduce that withholding at closing. That is why early planning has real economic value.
The parties do not decide on their own that a lower amount seems fair. The withholding must follow an applicable statutory exception or a formal process with the Internal Revenue Service. Escrow coordinates documents and funds, but the underlying tax determination should be made with qualified tax counsel or a CPA experienced in cross-border real estate matters.
Residential Exceptions and Reduced Rates
Certain buyer-occupancy rules can reduce or eliminate FIRPTA withholding on residential property. The key factor is not whether the foreign seller used the property as a home. It is whether the buyer acquires the property for use as a residence.
If the amount realized is $300,000 or less and the buyer intends to use the property as a residence, FIRPTA withholding may be eliminated. If the sale price is more than $300,000 but not more than $1 million, withholding may be reduced to 10%, provided the buyer meets the residence-use requirements. Above $1 million, the general 15% rate typically applies.
For this purpose, the buyer must intend to reside at the property for at least 50% of the days it is used during each of the first two 12-month periods following the transfer. A vacation home can potentially qualify, depending on actual intended use. A pure rental acquisition generally will not.
These rules can be helpful for a buyer purchasing a primary residence or second home in Los Angeles, but they do not create a casual workaround. The purchaser’s intent must be genuine and supported by the transaction facts. An investor should not sign a residence certification merely to lower a seller’s withholding.
The Non-Foreign Affidavit
The most common reason FIRPTA does not apply is that the seller is not a foreign person. In that circumstance, the seller generally provides the buyer with a signed non-foreign affidavit, often called a FIRPTA affidavit or certification of non-foreign status.
The affidavit contains specific identifying information and certifications under penalty of perjury. Buyers, their counsel, and escrow should review it for completeness, but they are not expected to conduct an unlimited investigation. Still, a buyer cannot disregard facts that indicate the certification may be false. If the seller’s status is uncertain, address it before contingency removal and certainly before closing.
Entity ownership requires added care. A California LLC does not automatically make a foreign owner exempt from FIRPTA. The classification and tax status of the entity, rather than the entity’s state filing alone, can control the analysis.
How a Withholding Certificate Can Help
A foreign seller who expects actual tax liability to be less than the required withholding can apply to the IRS for a withholding certificate. The application may request a reduced amount or, in some circumstances, no withholding. This can be particularly relevant where the seller has a low gain, a capital loss, a high tax basis from documented improvements, or a transaction structured as a qualifying 1031 exchange.
Timing is critical. If a properly completed application is submitted by the date of transfer, escrow may generally retain the withholding funds while the IRS considers the request rather than immediately remitting them. The parties should build this possibility into the contract and closing plan. IRS processing times can vary, and a seller should not assume the funds will be released immediately after closing.
A 1031 exchange deserves separate attention. It can defer gain if the statutory requirements are met, but it does not automatically eliminate FIRPTA withholding. The exchanger’s qualified intermediary, tax advisor, escrow team, and real estate professionals need to coordinate well before the relinquished property closes.
Closing Mechanics and California Considerations
When FIRPTA withholding applies, the buyer or closing agent generally submits the withholding and required forms to the IRS within 20 days after the transfer. The seller later files the appropriate U.S. federal income tax return, reports the sale, calculates the actual tax owed, and claims credit for the amount withheld. If too much was withheld, the seller may receive a refund through that return.
California has separate real estate withholding rules that may also apply to a sale. Federal FIRPTA and California withholding are different systems with different forms, exemptions, rates, and timing. A seller should not assume that satisfying one resolves the other.
The best time to identify FIRPTA is before a property enters the market. For a foreign owner, a confidential conversation with a cross-border tax professional can clarify status, estimate potential withholding, organize basis and improvement records, and determine whether a withholding-certificate application makes sense. With the right guidance, a complex tax requirement becomes a planned part of closing rather than an unwelcome surprise when escrow is ready to fund.