FIRPTA Withholding: What Israeli Investors Need to Know When Selling US Property

What Is FIRPTA and Why Does It Affect Foreign Sellers?

FIRPTA — the Foreign Investment in Real Property Tax Act — is a federal law requiring the buyer of US real estate to withhold a portion of the sale price when the seller is a foreign person, and remit it directly to the IRS. If you are an Israeli investor selling a US property, FIRPTA applies to you. Understanding it before closing day is not optional — it directly determines how much cash you walk away with.

The law exists because the IRS cannot easily collect taxes from non-resident aliens (foreign nationals who do not live in the US) after a transaction closes and funds leave the country. Rather than chase foreign sellers after the fact, Congress put the obligation on the buyer: withhold first, reconcile later. The IRS collected approximately $4.6 billion in FIRPTA withholding in fiscal year 2022 alone — a figure that reflects just how actively foreign investors participate in US real estate markets.

How Much Is FIRPTA Withholding on a Foreign Investor's US Property Sale?

The standard FIRPTA withholding rate is 15% of the gross sales price — not of your profit, but of the full sale price. On a $500,000 property, that means $75,000 is withheld at closing before you receive a single dollar. The rate was increased from 10% to 15% in February 2016 under the PATH Act, and 15% applies to the vast majority of foreign-seller transactions today.

There is one reduced rate: 10% applies when the sales price is $300,000 or less and the buyer certifies they will use the property as a personal residence. If your property sells for $301,000, the reduced rate disappears. For most investment properties — rentals, multifamily, commercial — the full 15% applies regardless of size.

A worked example helps make this concrete. Suppose you sell a Tampa duplex for $350,000. At 15%, the buyer withholds $52,500 at closing. That money goes to the IRS, not to you.

Is FIRPTA Withholding a Final Tax or Can I Get a Refund?

FIRPTA withholding is not a final tax — it is a prepayment toward whatever US tax you actually owe on the gain. This is the most widespread misconception among foreign investors: many assume the withheld amount is gone permanently. It is not.

Your actual US tax liability is based on your capital gains tax — the tax owed on the difference between your net sale price and your cost basis (what you originally paid, plus eligible improvements and depreciation adjustments). If your withheld amount exceeds your actual capital gains tax liability, the IRS refunds the difference after you file a US tax return.

Using the same example: if you sold the duplex for $350,000, originally paid $220,000, and your adjusted cost basis after depreciation recapture is $200,000, your gain is $150,000. Depending on your applicable rate, your actual federal tax might be $30,000 — meaning you would receive a refund of approximately $22,500 of the $52,500 withheld. Filing a US return is the mechanism; the refund does not happen automatically.

Can a Foreign Seller Reduce or Waive FIRPTA Withholding Before Closing?

Yes — and this option is underused. A foreign seller can submit Form 8288-B, known as a withholding certificate application, to the IRS before the closing date. The certificate asks the IRS to reduce withholding to the amount of estimated tax actually owed on the transaction rather than the full 15% of gross price.

If approved, the buyer withholds the reduced certified amount instead of the statutory 15%. The IRS targets a 90-day processing window, which means this strategy requires advance planning — ideally three to four months before the expected closing date. If your transaction timeline is tight, a 1031 exchange (discussed below) is another path, but the withholding certificate is the most direct tool.

A withholding certificate makes the most sense when your capital gain is modest relative to the sale price — for example, if you are selling at a price close to what you paid, withholding 15% of gross would dramatically over-collect compared to the tax you actually owe.

Who Files the Paperwork and What Happens If They Miss the Deadline?

The buyer — not the foreign seller — bears the legal obligation to withhold, file Form 8288, and remit the funds to the IRS within 20 days of closing. This surprises many foreign investors, who assume the withholding is their responsibility to arrange.

If the buyer fails to withhold and remit on time, the IRS holds the buyer liable for the full unwithheld amount, plus daily interest and penalties up to 20% of the unpaid withholding. Foreign sellers should confirm with their closing attorney or title company that FIRPTA withholding procedures are in place — not because you are responsible for filing, but because a buyer who is unaware can create complications that delay the release of your funds.

Does FIRPTA Apply If I Own US Real Estate Through an LLC?

FIRPTA applies to any US Real Property Interest (USRPI) — which includes direct ownership of real property and ownership through entities that hold real property. Whether it applies to your LLC depends on how the entity is classified for US tax purposes.

The most common structure for Israeli investors is a single-member US LLC, which is treated as a disregarded entity by the IRS. In that case, the IRS looks through the LLC to the foreign owner, and FIRPTA applies exactly as it would if you owned the property directly. A multi-member LLC with foreign members may trigger FIRPTA at the entity level on certain distributions. A foreign-owned US C-corporation selling real property faces different rules — the corporation itself is the seller, and FIRPTA may or may not apply depending on whether the entity qualifies as a US Real Property Holding Corporation (USRPHC).

The short answer: entity structure can change how FIRPTA applies, but it rarely eliminates it for a foreign investor. Tax counsel familiar with cross-border structures is essential before choosing your holding entity.

How Does FIRPTA Affect a 1031 Exchange for a Foreign Investor?

A 1031 exchange allows a US real estate investor to defer capital gains tax by rolling proceeds from one property sale into a like-kind replacement property. Foreign investors can legally use a 1031 exchange to defer their US capital gains tax — but FIRPTA withholding does not automatically defer along with it.