New York continues to attract significant foreign capital into commercial and residential real estate, and for good reason. The market offers stability, liquidity, and long-term appreciation that few other jurisdictions can match. When a real estate acquisition involves a foreign seller or buyer, federal tax rules create additional obligations. These rules apply separately from the purchase price, contract terms, or property details. Foreign investors must consider these requirements when planning current acquisitions or future sales.
That layer is FIRPTA, the Foreign Investment in Real Property Tax Act, and it creates obligations that fall directly on the buyer, not just the seller. Understanding real estate acquisition and FIRPTA together is essential for any party entering a transaction involving foreign ownership. Buyers who close on a real estate acquisition without understanding this law can become personally liable for taxes they never expected to owe, while foreign investors who acquire property without planning for FIRPTA’s eventual impact can face steep, avoidable costs when they later sell or pass the property to heirs.
Understanding how FIRPTA intersects with a real estate acquisition, and structuring the deal correctly from day one, protects both sides of the transaction long before either side thinks about selling.
How FIRPTA Affects a Real Estate Acquisition
Who Counts as a Foreign Person
The Withholding Requirement
Exceptions and Reduced Withholding
Certain transactions qualify for reduced or eliminated withholding. A common exception applies when the buyer intends to use the property as a personal residence and the sales price is below a specific threshold. Sellers can also apply for a withholding certificate from the IRS in advance of closing, allowing withholding to be based on the seller’s actual anticipated tax liability rather than the full gross sales price, which can significantly reduce the amount tied up after closing.
Buyer Liability for Non-Compliance
If a buyer fails to withhold when required, the IRS can hold the buyer personally liable for the tax that should have been withheld, along with penalties and interest, even though the underlying tax liability belonged to the seller. This is the aspect of FIRPTA that most often surprises buyers who were not advised of the requirement in advance.
Acquisition Structuring for Foreign Investors
Real estate acquisition and FIRPTA planning go hand in hand for foreign investors. Owning property directly as an individual exposes a foreign investor to FIRPTA withholding on a future sale and, separately, to US estate tax exposure that is far more limited for non-resident aliens than for US citizens. Structuring the acquisition through a properly formed entity, such as a domestic LLC or a foreign corporation, can materially change how FIRPTA and estate tax exposure apply down the line. Working with experienced private lending and acquisition counsel from the outset ensures these structures are built into the transaction before problems arise.
Client Challenges Without Proper Legal Guidance
Real estate acquisitions involving foreign buyers or sellers introduce risks that a standard domestic transaction simply does not present.
Buyers Unaware of Their Withholding Obligation
Many buyers do not realize that FIRPTA withholding is their responsibility, not the seller’s, until it is raised late in the transaction, sometimes not until after closing when the IRS sends a notice.
Sellers Without a US Taxpayer Identification Number
Foreign sellers who have never obtained an Individual Taxpayer Identification Number can face delays in closing, since the withholding certificate process and the required IRS filings generally depend on having a valid taxpayer ID in place.
Overwithholding That Ties Up Capital
Without a withholding certificate obtained in advance, the full 15 percent of the gross sales price is typically withheld, even when the seller’s actual tax liability is much lower. That capital can remain tied up with the IRS for months while a refund is processed.
Foreign Investors Exposed to Unplanned Estate Tax
Foreign individuals who acquire US real property directly, without entity planning, can expose their estate to US estate tax on the full value of that property at death, since the exemption available to non-resident aliens is dramatically lower than the exemption available to US citizens.
Missed Filing Deadlines
The 20 day window to remit withheld funds to the IRS after closing is strict, and buyers who are not prepared for this filing requirement can face penalties even when the withholding itself was calculated correctly.
Private Lending Complications
Private lenders financing an acquisition where the seller is a foreign person need to understand how FIRPTA withholding affects the funds available at closing, since the withheld amount is not available to satisfy the seller’s payoff obligations or other closing costs.
Applications and Benefits of Proper FIRPTA Planning
For Domestic Buyers
A buyer purchasing from a foreign seller protects themselves from personal tax liability by confirming the seller’s status early, calculating the correct withholding amount, and filing the required IRS forms on time.
For Foreign Investors Acquiring Property
Investors who structure their real estate acquisition and FIRPTA planning together from the outset can significantly reduce withholding friction and estate tax exposure when the property is eventually sold or passed to heirs.
For Sellers
Foreign sellers who obtain a withholding certificate before closing, or who work with counsel to coordinate the ITIN application process in advance, can avoid unnecessary capital being tied up after the sale.
For Private Lenders
Lenders financing transactions involving a foreign seller benefit from understanding how withholding affects available funds at closing, allowing loan terms and payoff calculations to be structured accurately. The IRS FIRPTA withholding guidance outlines exactly how these obligations are calculated and when exceptions apply.
For Joint Ventures with Foreign Capital Partners
Investors partnering with foreign capital in a real estate acquisition need entity structuring that addresses FIRPTA and estate tax exposure specifically for the foreign partner’s ownership interest, rather than treating the entity as a single uniform taxpayer.
Across each of these scenarios, the underlying principle is the same. FIRPTA compliance is not a formality to address after the fact. It is a structural decision that should be built into the acquisition from the beginning.
Frequently Asked Questions About FIRPTA and Real Estate Acquisition
How much must a buyer withhold under FIRPTA?
In most transactions where the seller is a foreign person, the buyer must withhold 15 percent of the gross sales price and remit it to the IRS within 20 days of closing.
Does FIRPTA apply if the buyer is also a foreign person?
Yes. The withholding obligation is based on the seller’s status, not the buyer’s, so a foreign buyer purchasing from a foreign seller still has the same withholding responsibility as a domestic buyer would.
Can a foreign investor avoid FIRPTA entirely by using an LLC?
Not entirely, but the structure used to hold the property can significantly change how FIRPTA withholding and US estate tax apply when the property is eventually sold or transferred, which is why acquisition planning matters well before any sale is contemplated. The IRS guidance on foreign ownership of US real property provides further detail on how different entity types are treated under the law.
What happens if a buyer misses the 20 day FIRPTA filing deadline?
The IRS can assess penalties against the buyer even when the withholding amount itself was correct. The filing deadline runs from the date of closing, not from when the buyer becomes aware of the obligation, which is why pre-closing preparation is critical.
Choosing the Right Legal Partner
FIRPTA compliance requires coordination between legal counsel, accountants, and often the IRS itself, and not every firm handling a real estate acquisition has direct experience with these requirements. Look for:
- Direct experience with FIRPTA withholding and IRS filing requirements, not just general awareness that the law exists
- Familiarity with entity structuring for foreign investors, including how ownership vehicles affect future withholding and estate tax exposure
- Coordination with accountants and tax professionals, since FIRPTA compliance depends on accurate tax calculations alongside legal documentation
- Experience with private lending transactions involving foreign parties, since financing structures must account for withholding at closing
- Responsiveness to strict IRS deadlines, particularly the 20 day window for remitting withheld funds after closing
Structure Your Acquisition Before FIRPTA Becomes a Problem
If you are buying property from a foreign seller, structuring an acquisition as a foreign investor, or financing a transaction that involves either scenario, contact Andelsman Law today to make sure your acquisition is structured to avoid unnecessary tax exposure and compliance risk.
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