Investing in U.S. Real Estate: FIRPTA Withholding Tax

For many foreign real estate investors in the United States, FIRPTA withholding can have a significant impact on the closing of a real estate transaction. Israeli investors who are looking to acquire real estate in the United States often assume that the tax withheld at source in the United States is the final tax payable. In practice, however, it is usually only a mechanism for making an advance tax payment.

As of 2026, there is generally an obligation to withhold 15% of the consideration at the time of sale and remit it to the U.S. Internal Revenue Service (IRS). The purpose of the FIRPTA regime is to ensure that the foreign seller pays the taxes applicable to the sale. Failure to comply with this withholding obligation may result in penalties. This article explains what FIRPTA is, how the withholding tax mechanism works in this context, when exemptions or reduced withholding rates may apply, and how the property seller can obtain a refund for excess tax withheld.

What is FIRPTA

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted to ensure that foreign real estate investors pay all taxes applicable to them in the United States when selling real estate. Before the law was enacted, it was difficult to collect tax from non-U.S. real estate sellers after they had left the country, or in cases where the seller did not reside in the United States at all.

FIRPTA addresses this difficulty by imposing a withholding tax obligation at the time the transaction is completed, rather than waiting for the sale to be reported as part of a tax return filing. Under FIRPTA, when a non-U.S. person sells an interest in U.S. real property, the transaction is subject to U.S. withholding tax, generally at a rate of 15% of the amount realized. This applies regardless of whether the seller is ultimately liable for tax in practice, since exemptions, reliefs and similar mechanisms may be available. For Israeli investors in U.S. real estate, this means that the proceeds from the sale of their U.S. property may be transferred to them after withholding tax has been deducted. At a later stage, a refund may be available if the tax withheld exceeds the seller’s total tax liability.

To apply FIRPTA, the following steps should be taken:

1. Determine whether the seller is a foreign person for FIRPTA purposes.
2. Review the amount of consideration received and/or assets received and/or liabilities assumed by the buyer.
3. Check whether any exceptions or reduced withholding tax rates apply.
4. File Form 8288 and Form 8288-A within the required deadline.

What is considered a U.S. real property interest

A U.S. real property interest includes more than just houses or apartments. The definition of a real property interest for FIRPTA purposes includes:

• Real property located in the United States or the U.S. Virgin Islands
• Interests in land, buildings, mines or natural deposits
• Certain personal property associated with the use of real property

For example, the IRS notes that this may include property associated with the use of real property, such as farming equipment. In other words, FIRPTA may apply not only to the land or building itself, but also to certain related assets connected with their use.

• Shares in a U.S. corporation that primarily holds U.S. real property

FIRPTA may also apply when an Israeli investor, or another foreign investor, sells shares of a corporation rather than the property itself, if the corporation is classified as a U.S. real property holding corporation. As a general rule, a corporation will be considered as such if the fair market value of its U.S. real property interests equals or exceeds at least 50% of the total fair market value of its U.S. real property interests, its interests in real property outside the United States, and certain other assets.

Who is subject to FIRPTA tax

As a matter of principle, FIRPTA places responsibility for complying with the withholding tax obligation on the buyer of the property. This means that the buyer must determine whether the seller is a foreign person subject to FIRPTA. If withholding tax is required and is not carried out, the buyer may be liable for the tax, as well as penalties and interest.

Given the specific knowledge required in matters of this kind, the withholding process is usually handled in practice by an agent or another party responsible for completing the transaction. This allocation of responsibility is especially important in transactions involving Israeli sellers, because even if the seller expects to settle all tax matters at a later stage, the buyer remains the party exposed if FIRPTA withholding is not performed.

How much tax must be withheld?

In more detail, the standard withholding tax rate is 15% of what is defined as the “amount realized” on the sale. The “amount realized” consists of:

• Cash paid to the seller;
• The fair market value of any other property transferred;
• Any liability assumed by the buyer, such as an existing mortgage.

This is an important point that many real estate investors are not aware of: FIRPTA withholding is calculated as a percentage of the property’s sale price, and not only on the gain embedded in the sale.

Exemptions or options for reduced withholding

FIRPTA includes several important exceptions and relief mechanisms:

• If the buyer acquires the property for use as a personal residence and the purchase price falls within the statutory threshold ranges, a reduced rate, if any, will apply. As a general rule, no withholding is required if the purchase price does not exceed $300,000 and the residence requirement is met, while a reduced withholding rate of 10% may apply to certain purchases of residential property above that amount and up to $1,000,000.
• Another exemption applies when the seller obtains a withholding certificate from the IRS by filing Form 8288-B. This certificate allows the IRS to approve a lower withholding tax rate, or even eliminate withholding, if the seller’s expected tax liability is lower than 15%. This exception is common where the seller’s actual gain is negligible, so that the applicable tax is correspondingly low, or where there are losses or deductions that can be taken into account.

In addition, if the seller is in fact a U.S. person, the seller may provide an affidavit confirming that status, in which case FIRPTA does not apply.

How should FIRPTA withholding tax be reported?

FIRPTA withholding tax should be reported using two forms:

• Form 8288 – U.S. Withholding Tax Return. This form is used to report the tax withheld upon the acquisition of a U.S. real property interest from a foreign person. It also serves as the transmittal form for Form 8288-A.
• Form 8288-A – Application for Exemption from Withholding Tax. This form is filed by the buyer for each person from whom tax was withheld, where there are multiple sellers.

These forms generally must be filed within 20 days of the date of sale. The taxpayer identification numbers (TINs) of both the buyer and the seller must be included. If the seller does not yet have a U.S. taxpayer identification number, the seller may apply for an Individual Taxpayer Identification Number (ITIN) using Form W-7, sometimes together with the application for exemption from withholding tax.

Israeli investors who do not yet have a U.S. taxpayer identification number should prepare for this in advance, as the absence of identification details may complicate the filings and delay refunds.

Can a foreign seller receive a refund?

When the amount withheld under FIRPTA exceeds the seller’s actual U.S. tax liability for the year of sale, a refund can be obtained from the IRS. As noted above, the withholding tax rate does not, in itself, determine the final tax. Instead, it serves as a mechanism for making an advance tax payment. The seller’s actual tax liability will be determined when filing a U.S. income tax return for the relevant tax year. If the final tax is lower than the amount withheld, or if no tax should apply at all, the seller may claim a refund from the IRS.

Naturally, this situation is common where the property is sold at a loss, where the gain for tax purposes is particularly low, where a tax treaty reduces the tax rate, or where allowable deductions reduce the taxable gain.

TaxLink – Our Story

TaxLink is an accounting firm with a team of professionals specializing in Israeli taxation and U.S. taxation. Our practical experience working with the IRS and with the Israel Tax Authority, together with a deep understanding of the interface between the two systems, allows us to build a solution tailored to your case from end to end.

Most clients who contact us do so because they are required to file a report in the United States – whether it is a Form 1040 return, FATCA reporting, FBAR reporting, or a U.S. real estate investment or property. We manage the process as one integrated matter, in order to reduce errors, minimize duplication and help prevent double taxation – all within the framework of the law and the treaty between Israel and the United States, and in accordance with your specific circumstances.

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