FIRPTA, the Foreign Investment in Real Property Tax Act, makes sure the US collects tax when a foreign person sells US real estate. It does that by turning the buyer into a tax collector: unless an exception applies, the buyer withholds part of the price and sends it to the IRS. For a foreign investor who flips, builds to sell or eventually sells a rental, FIRPTA affects the cash you receive at closing, so it belongs in the plan from the start.
This page is general information based on IRS guidance, not tax advice. The answer for your structure depends on facts only a US tax adviser can review.
The basic rule
- Rate: the buyer generally withholds 15% of the amount realized, which is broadly the sale price, not the gain
- Who withholds: the buyer (the transferee) is the withholding agent
- Deadline: the buyer files Form 8288 and pays the amount withheld by the 20th day after the transfer
- Statement: Form 8288-A goes to the seller, who uses it to claim credit for the tax withheld
- Exceptions include a buyer who acquires the property as a residence for $300,000 or less, and a withholding certificate issued by the IRS
Single-member LLC treated as a disregarded entity
This is the most common structure for a foreign investor holding one property. A single-member LLC is disregarded for US income tax by default, and the IRS instructions for Form 8288 are explicit: a disregarded entity cannot be the transferor for FIRPTA purposes; the person who owns its assets for tax purposes is. If that owner is a foreign individual or a foreign company, the buyer withholds 15%, even though the deed is in the name of a US LLC.
The owner then files a US income tax return for the year of sale, reports the gain and claims the withholding as a credit, with a refund if more was withheld than the tax due. The IRS will not provide the stamped copy of Form 8288-A to a seller without a US taxpayer identification number, so the owner will usually need one to claim the credit.
LLC taxed as a partnership
An LLC with two or more members is taxed as a partnership by default. A domestic partnership is a US seller, so the buyer does not withhold under the general FIRPTA rule. Instead, the IRS instructions provide that a domestic partnership that is not publicly traded withholds under section 1446 on the effectively connected income allocable to its foreign partners. That withholding is computed on the partner's share of the gain, at the highest applicable US rate for that type of partner, rather than on the price.
LLC that has elected corporate taxation
An LLC can elect to be taxed as a corporation. It is then a US corporation: it can certify that it is not a foreign person, so the buyer does not withhold, and the company pays US corporate income tax on its gain. Tax arises again when profits are distributed to the foreign shareholder, and separate FIRPTA rules apply if the shareholder later sells the shares or the company distributes real property. Whether this structure suits you depends heavily on your home country's treatment, which is a question for your adviser.
The three structures side by side
- Disregarded single-member LLC: the foreign owner is the seller; the buyer withholds 15% of the price; the owner files a US return and claims the credit
- Partnership LLC: the LLC is the seller; no FIRPTA withholding by the buyer; the LLC withholds under section 1446 on gain allocated to foreign partners
- LLC taxed as a corporation: the LLC is a US seller; no withholding by the buyer; corporate tax on the gain, then tax on distributions to the foreign owner
Reducing the 15% with a withholding certificate
Because 15% of the price can far exceed the tax on a modest gain, the seller can apply to the IRS on Form 8288-B for a withholding certificate that reduces the withholding to the expected tax. If the application is pending at closing, the IRS instructions allow the buyer to hold the amount and remit it within 20 days after the IRS mails its decision. Apply well before closing.
State rules can add their own withholding. California, for example, generally requires withholding of 3 1/3% of the sale price on sales of California real property unless an exemption or the alternative calculation applies.
What it means for your financing
FIRPTA does not change the loan: Passy Capital finances fix and flip, construction, bridge and DSCR loans to foreign-owned US LLCs on the same terms as US investors. It changes your cash at the exit. On a flip or a spec home, the sale proceeds first repay the loan; the withholding comes out of what is left, and that money is tied up until the return or the certificate settles it. Build that into the cash plan for the next project.