Foreign Investment in US Real Estate & FIRPTA

What a foreign investor owes the IRS on US property, from the day rent starts coming in to the day the property sells, explained by a bilingual Houston firm that works the inbound direction as often as the outbound one.

Representation on the Mexico Side

The Three Moments US Tax Reaches a Foreign Property Owner

Most foreign investors expect a single tax event at sale. There are three, and only one of them is the sale.


  • While you hold it. Rental income from US real estate is US-source income, and how it is taxed depends on an election you either make or do not make
  • When you sell it. FIRPTA withholding takes a percentage of the gross sales price at closing, before anyone calculates what you actually owe
  • If you die owning it. US real estate is US-situs property for estate tax purposes, and the exemption for a non-domiciliary is $60,000, not the figure US citizens are accustomed to


The three are governed by separate rules and separate planning windows. The structure you buy the property in largely determines all three, which is why the useful conversation happens before closing rather than after.

How FIRPTA Withholding Actually Works at Closing

The Foreign Investment in Real Property Tax Act, codified at Internal Revenue Code section 1445, requires the buyer to withhold a percentage of the gross sales price when the seller is a foreign person and remit it to the IRS.


Two features of that sentence cause most of the confusion:

  • Withholding is on the gross sales price, not on your gain. A property sold at a loss can still have tax withheld
  • The buyer is the withholding agent and carries the liability for getting it wrong, which is why buyers and title companies default to withholding the maximum whenever there is any doubt about the seller's status


The standard rate is 15% of the amount realized. A reduced 10% rate applies where the property will be used by the buyer as a residence and the price falls in the range between $300,000 and $1,000,000. A full exemption applies where the price is $300,000 or less and the buyer acquires it for use as a residence. The buyer reports and remits using Forms 8288 and 8288-A, generally within 20 days of closing.

Getting Back What Was Over-Withheld

Withholding is not the tax. It is a deposit against a tax that has not been calculated yet, and on a modest gain it routinely exceeds the actual liability by a wide margin.


There are two ways to close that gap, and they differ mainly in timing.


Step 1: Apply for a withholding certificate before closing


Form 8288-B asks the IRS to reduce the withholding to the amount of tax actually expected on the sale. Filed early enough, it means the money never leaves your hands. It requires a US taxpayer identification number, which is the step most sellers discover too late.


Step 2: Or file a US return afterward and claim the refund


A foreign individual seller files Form 1040-NR for the year of sale, reports the actual gain, and claims the withheld amount as a credit. The difference comes back as a refund, on the IRS's timeline rather than yours.


Step 3: Either path requires an ITIN


A foreign seller without a Social Security number needs an Individual Taxpayer Identification Number, requested on Form W-7. Starting that application at closing rather than months earlier is the single most common cause of a delayed FIRPTA refund.

The Net Election That Changes How Your Rental Income Is Taxed

A foreign individual receiving US rental income faces two very different regimes, and the default is the worse one.


  • Without an election, rent is fixed, determinable, annual or periodical income taxed at a flat 30% of the gross rent, with no deduction for mortgage interest, property tax, insurance, management fees, repairs, or depreciation
  • With the election under section 871(d), the rental activity is treated as a trade or business, the income becomes effectively connected income, and it is taxed at graduated rates on net income after all of those deductions


On a leveraged rental property the net figure is frequently near zero or negative once depreciation is counted, which means the difference between the two regimes is often the difference between a real tax bill and none. The election is made with a statement attached to the return, and once made it applies to all of your US real property income and remains in effect until revoked with IRS consent. Your tenant or property manager also needs the correct withholding form on file, which is Form W-8ECI rather than Form W-8BEN once the election is in place.

The $60,000 Estate Tax Exposure Nobody Mentions at Closing

A non-domiciliary of the United States gets a US estate tax exemption of $60,000 against US-situs assets. US real estate is US-situs property. Directly held US stock is as well.



That figure is not indexed and bears no relationship to the exemption available to US citizens and domiciliaries. A foreign investor holding a $900,000 Houston property directly, with no planning, is holding an estate tax exposure at rates reaching 40% on the amount above $60,000. There is no US-Mexico estate tax treaty to soften it.


Ownership structure is the lever here, and it interacts with the income tax and FIRPTA analysis rather than sitting apart from it. Structures that improve the estate position sometimes worsen the income position, and the reverse. There is no single right answer, only a right answer for a specific investor's holding period, financing, income needs, and heirs.

Questions Foreign Property Investors Ask Most

  • How much is withheld when a foreign owner sells US property?

    Generally 15% of the gross sales price. It drops to 10% where the buyer will use the property as a residence and the price is between $300,000 and $1,000,000, and there is a full exemption where the price is $300,000 or less and the buyer will use it as a residence. Because it is calculated on gross price rather than gain, the amount withheld frequently exceeds the tax owed.

  • Can FIRPTA withholding be reduced or avoided?

    Reduced, in the right circumstances, by applying for a withholding certificate on Form 8288-B before closing so the IRS approves withholding at the expected actual tax instead. "Avoided" is the wrong frame — the tax remains due either way. What changes is whether the IRS holds your money for a year while a refund processes.

  • Do I pay US tax on rent from my US property if I live abroad?

    Yes, but the amount depends heavily on an election. Without it, 30% of gross rent with no deductions. With the section 871(d) election, graduated rates on net income after mortgage interest, taxes, insurance, and depreciation, which on a financed property is often a much smaller number.

  • Do I need an ITIN to sell US property?

    In practice yes, for either a withholding certificate application or the Form 1040-NR that claims your refund. Apply on Form W-7 as early in the transaction as possible, because ITIN processing time is the usual bottleneck in getting over-withheld money back.

Before You Close, Not After

FIRPTA is the moment investors call us, and it is the moment when the fewest options remain. The decisions that matter — ownership structure, whether the net election makes sense, whether an ITIN application should already be moving, how the estate exposure is handled — all sit earlier in the transaction. If you own US property already, our expat and foreign investment tax consulting covers the ongoing side, and businesses holding property through an entity should start with our page on foreign-owned US business tax.

Man seated at a desk with a laptop and notebook in a modern office, writing under warm pendant lights