Am I Considered a Foreign Person? A Guide on Understanding Your FIRPTA Status

If you’re involved in U.S. real estate transactions—or even just curious about your tax status—you may have asked yourself: “Am I considered a foreign person?” Under FIRPTA (the Foreign Investment in Real Property Tax Act), the answer to that question can have a significant impact on your tax obligations when selling U.S. property.

In this post, we’ll break down:

• Who is considered a foreign person under FIRPTA.

• How your status affects tax withholding when selling U.S. real estate.

• Key exceptions and strategies to reduce or avoid FIRPTA withholding.

What Does “Foreign Person” Mean Under FIRPTA?

FIRPTA was designed to ensure that foreign sellers pay U.S. taxes on gains from the sale of U.S. real estate. The IRS defines a “foreign person” very specifically:

U.S. Persons (Not Subject to FIRPTA Withholding) Include:

• U.S. citizens

• Resident aliens (those who meet the substantial presence test or hold a green card)

• Domestic corporations, partnerships, and LLCs (formed under U.S. law)

• Trusts or estates treated as U.S. taxpayers

Foreign Persons (Subject to FIRPTA Withholding) Include:

• Nonresident aliens (individuals who do not meet U.S. citizenship or residency requirements)

• Foreign corporations, partnerships, trusts, and estates (unless exempt under a tax treaty)

Why Does Your FIRPTA Status Matter?

If you’re classified as a foreign person, the buyer of your U.S. property must withhold a percentage of the sale price (usually 10-15%) and send it directly to the IRS. This ensures taxes are collected upfront—even before you file your return.

Key FIRPTA Withholding Rules:

• 15% withholding applies if the sale price exceeds $300,000.

• 10% withholding applies if the sale price is $300,000 or less.

• Withholding is based on the gross sale price (not your profit).

Good news: If too much is withheld, you can file a U.S. tax return (Form 1040-NR) to claim a refund.

How Can You Tell Which Category You Fall Into?

Determining your status starts with understanding your citizenship and tax residency:

Are You a U.S. Citizen or Resident Alien?

If you are a U.S. citizen or a resident alien (based on the IRS’s substantial presence test or holding a green card), you are not considered a foreign person under FIRPTA. No withholding applies.

Are You a Nonresident Alien?

If you are neither a U.S. citizen nor a resident alien, you are generally classified as a foreign person, and FIRPTA withholding may apply.

What About Entities (LLCs, Corporations, Trusts)?

The rules differ depending on how your business or trust is structured:

• Domestic Entities (U.S. LLCs, Corporations):

• Typically treated as U.S. persons, even if owned by foreign individuals.

• FIRPTA withholding does not apply unless the entity is a disregarded entity (see below).

• Disregarded Entities (Single-Member LLCs):

• The IRS "looks through" the LLC to the owner.

• If the owner is a foreign person, FIRPTA withholding applies.

• Foreign Entities (Foreign Corporations, Trusts):

• Generally subject to FIRPTA withholding.

• Exception: Some entities may qualify for reduced withholding under a tax treaty.

Can You Reduce or Avoid FIRPTA Withholding?

Yes! If FIRPTA withholding applies to you, there are ways to minimize or eliminate it:

1. Apply for a Withholding Certificate (IRS Form 8288-B)

• If you can prove that your tax liability is less than the standard withholding (e.g., due to losses, deductions, or installment sale treatment), the IRS may approve a reduced withholding rate.

2. Claim a Tax Treaty Benefit (If Applicable)

• Some countries have tax treaties with the U.S. that reduce or eliminate FIRPTA withholding.

• You must file IRS Form W-8BEN (for individuals) or W-8BEN-E (for entities) to claim treaty benefits.

3. Sell the Property in an Installment Sale

• If the buyer pays in installments, FIRPTA withholding may apply only to each payment (rather than the full sale price upfront).

Examples to Clarify FIRPTA Rules

Example 1: U.S. Citizen Selling Property

• Maria, a U.S. citizen, sells a Florida home through her U.S. LLC.

• Result: No FIRPTA withholding applies because she is a U.S. person.

Example 2: Nonresident Alien Selling Directly

• Juan, a Spanish citizen (nonresident alien), sells a Miami vacation home in his own name.

• Result: The buyer must withhold 10-15% of the sale price under FIRPTA.

Example 3: Foreign-Owned Disregarded LLC

• Li, a Chinese citizen (nonresident alien), owns a Florida single-member LLC selling property.

• Result: Since the LLC is a disregarded entity, FIRPTA withholding applies as if Li sold the property directly.

What Should You Do If You’re Unsure About Your Status?

Tax classifications can be complex, and FIRPTA rules have significant financial implications. If you’re uncertain:

1. Review Your Tax Documents

• Check past filings (e.g., Form 1040-NR, W-8BEN) to confirm residency status.

2. Consult a Tax Professional

• A CPA or tax attorney can clarify your status and help with FIRPTA compliance.

3. Stay Updated on Tax Laws

• FIRPTA rules and treaties can change—always verify the latest IRS guidelines.

Final Thoughts

Determining whether you are considered a foreign person is a crucial step in understanding your FIRPTA obligations. If you find that you are classified as a foreign person, it’s important to be proactive in managing your U.S. real estate transactions. Knowing your status helps you plan for potential withholding, reclaim overpaid taxes, and ultimately make smarter investment decisions.

If you have any questions or need personalized guidance, feel free to reach out to our team. Our expertise is here to ensure you navigate FIRPTA rules with confidence and clarity.