FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980. This U.S. federal tax is an imposed income tax on foreign persons disposing of real property here in the U.S. Title companies are required to withhold a TEN PERCENT (10%) tax on the sales price of the property being sold. The U.S. law requires that all persons, whether foreign or domestic, pay income tax on dispositions on interest in U.S. real estate. Domestic persons are subject to this capital gains tax as part of their regular income tax that is filed annually. Foreign persons that do not file annually with the IRS so the tax must be collected at closing.
Sellers may apply to the IRS for a reduced tax rate and any approval for such a reduced rate may be submitted to the closing agent at the time of closing. Many foreign Sellers consult with accountants that specialize in FIRPTA tax.