FIRPTA Explained: What DFW Buyers and Sellers Need to Know When a Foreign Person Is on the Deal

 

North Texas is one of the most internationally connected real estate markets in the country. With corporate relocations, foreign investment in the DFW Metroplex, and a steady flow of buyers and sellers from around the world, there's a federal tax rule that quietly shapes more transactions here than most people realize: FIRPTA.

If you're buying a home and the seller turns out to be a foreign person — or you're selling and you're the foreign person — FIRPTA can change the math, the paperwork, and the timeline of your closing. Handled correctly, it's a manageable speed bump. Handled carelessly, it can cost the buyer real money and stall a deal at the closing table.

Here's a plain-English walkthrough for both sides. One important note up front: I'm a broker, not a CPA or tax attorney, and nothing here is tax or legal advice. FIRPTA determinations belong with a qualified tax professional — and as you'll see, that's not just my caution, it's exactly what the Texas Real Estate Commission instructs license holders to do.

---

What Is FIRPTA?

FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980 (Internal Revenue Code §1445). Its purpose is simple: make sure the IRS collects income tax on the gain when a foreign person sells U.S. real estate — before the seller and their money potentially leave the country.

The mechanism is where it gets interesting. Rather than chasing a foreign seller for taxes after the fact, FIRPTA puts the obligation on the buyer. When a foreign person sells U.S. real property, the buyer is required to withhold a percentage of the sale price at closing and send it to the IRS. In tax language, the buyer is the "withholding agent."

That's the part that surprises people: the buyer is the one legally on the hook, even though it's the seller's tax being collected.

---

Who Counts as a "Foreign Person"?

FIRPTA applies when the seller is a "foreign person," which can include:

• A nonresident alien individual
• A foreign corporation, partnership, trust, or estate

It does not automatically apply to every non-U.S. citizen. A resident alien — for example, a green card holder, or someone who meets the IRS "substantial presence test" — is generally not treated as a foreign person for FIRPTA purposes. This is exactly where it gets technical: residency for tax purposes is a specific IRS calculation, not the same as immigration status or where someone happens to live.

This is the single most important reason to involve a CPA early. Determining whether a seller is truly "foreign" under the tax code is not something a buyer, seller, or real estate agent should be guessing at.

---

The Withholding Rates

When FIRPTA applies, the amount the buyer must withhold depends on the sale price and how the buyer intends to use the property. There are three tiers:

*The residence exemptions come with a catch: the buyer must sign an affidavit stating they intend to use the property as a residence for at least 50% of the days it's occupied during each of the first two 12-month periods after closing. That's a real commitment, not a checkbox — and the buyer assumes responsibility for that representation.

A few things worth underlining:

• The withholding is calculated on the gross sale price (the "amount realized"), not on the seller's profit.
• Commercial property and any residential sale over $1 million is 15%, period.
• Interestingly, the rate depends partly on the buyer's plans — which is why both sides need to coordinate early.

---

The Most Important Concept: Withholding Is Not the Tax

This trips up almost every foreign seller the first time. FIRPTA withholding is a prepayment, not the actual tax bill.

The withholding is a flat percentage of the gross sale price. But the seller's actual tax is calculated on the net gain — sale price minus cost basis (what they paid, plus improvements and selling costs). Because non-resident long-term capital gains generally land in the 15%–20% range on the gain, the 15% withheld on the gross price is very often more than the real tax owed.

A simplified example to show the gap:

A foreign seller sells a DFW property for $500,000 that they originally bought for $300,000.

• FIRPTA withholding: 15% × $500,000 = $75,000 held back at closing.
• Actual capital gains tax on the $200,000 gain (at a 20% rate) ≈ $40,000.
• The seller files a U.S. tax return afterward and is potentially refunded the difference.

That difference is real money tied up with the IRS for months. Which leads to the strategies sellers use to avoid over-withholding — more on that below.

---

For Buyers: You Are the Withholding Agent

If you're buying from a foreign person, here's what you need to internalize:

1. The liability is yours. A buyer who is required to withhold but fails to do so can be held personally liable for the tax that should have been withheld — plus penalties and interest. Title and escrow companies often help with the logistics, but the legal responsibility sits with the buyer.

2. You must determine the seller's status — or rather, confirm it. FIRPTA requires the buyer to find out whether the seller is a foreign person. In practice, this is resolved through a seller's affidavit (below) and the guidance of the title company and a tax professional.

3. The deadline is tight. The withheld funds, along with IRS Forms 8288 and 8288-A, must be reported and paid to the IRS within 20 days of closing. In most DFW transactions, the title company handles the remittance — but confirm that's happening; don't assume.

4. Get the residence question right. If you're claiming the 0% or 10% rate based on personal-residence use, understand the affidavit you're signing and the two-year occupancy representation it requires.

---

For Sellers: Protecting Your Proceeds

If you're a foreign person selling in DFW, your biggest concern is usually liquidity — not wanting $75,000 (or more) of your equity locked up with the IRS for months while you wait on a refund. You have options, but they require planning before closing:

1. Apply for a Withholding Certificate (Form 8288-B). This is the key tool. A foreign seller can apply to the IRS to reduce the withholding to their actual expected tax liability, rather than the flat 15% of gross. If approved, far less money gets held back. The catch: you generally want to file this well before closing (90 days ahead is a common recommendation), because IRS processing takes time. Start early or you lose the benefit.

2. Get your ITIN in place. To file U.S. tax forms and ultimately claim any refund, a foreign seller needs an Individual Taxpayer Identification Number (ITIN), obtained via IRS Form W-7. ITIN processing can take many weeks, so this is another "start early" item.

3. Document your cost basis. Your actual tax is on the gain, so keep meticulous records of your purchase price, capital improvements, and selling costs. The better your documentation, the more accurately your true (lower) liability can be established.

4. File your return to recover the excess. After the sale, the foreign seller files a U.S. tax return (Form 1040-NR for individuals), claims the FIRPTA withholding as a credit against the actual tax owed, and requests a refund of the excess. Refunds commonly take several months to process.

---

The Texas Angle: TREC Paragraph 20

This is where it gets specific to how we do deals in Texas. The standard TREC residential contract addresses FIRPTA directly in Paragraph 20, "Federal Tax Requirements."

In plain terms, that paragraph provides that if the seller is a foreign person, or if the seller fails to deliver a signed affidavit certifying they are not a foreign person, then the buyer is directed to withhold from the sales proceeds as FIRPTA requires and to take the steps the law mandates. In other words, the contract you're already signing builds the FIRPTA obligation right into the deal.

The practical workhorse here is the Seller's Affidavit of Non-Foreign Status (often called a FIRPTA affidavit or certification of non-foreign transferor). When a seller is not a foreign person, they sign this affidavit — certifying their non-foreign status and providing their U.S. taxpayer ID — and it relieves the buyer of the withholding obligation. The vast majority of DFW closings include this affidavit as a routine document, and most sellers sign it without a second thought because they're U.S. persons.

It's only when that affidavit can't be signed — because the seller genuinely is a foreign person — that the full FIRPTA machinery kicks in.

---

The Compliance Line Agents Cannot Cross

Here's the part I take seriously, and that every agent in our brokerage should too.

The Texas Real Estate Commission is explicit: a license holder should NOT take it upon themselves to determine whether a seller has a tax obligation under FIRPTA. TREC's guidance states that a prudent broker keeps a list of CPAs and attorneys familiar with FIRPTA to refer foreign sellers to — and lets those professionals advise on the actual tax obligations.

TREC also notes that resolving the FIRPTA question is not the title company's job to handle on the parties' behalf, and that the buyer should make sure the issue is settled before closing.

So the division of labor looks like this:

• The real estate agent flags the issue early, makes sure it's on everyone's radar, ensures the affidavit question is addressed, and refers the parties to qualified professionals. The agent does not decide foreign status or give tax advice.
• The CPA or tax attorney determines foreign-person status, calculates true liability, and handles 8288-B / ITIN / 1040-NR strategy.
• The title/escrow company typically handles the mechanical withholding and remittance to the IRS at closing.
• The buyer carries the ultimate legal liability for proper withholding and confirms it actually happened.

---

A Practical Checklist

If you're buying:

• Ask early whether the seller can sign a non-foreign status affidavit
• If they can't, treat FIRPTA as a real closing issue from day one
• Confirm — in writing — that the title company is handling the withholding and the 20-day Form 8288 filing
• Understand any residence affidavit you sign for a reduced rate
• Keep a tax professional in the loop; the liability is yours

If you're selling as a foreign person:

• Engage a FIRPTA-experienced CPA before you list, if possible
• Apply for your ITIN (Form W-7) right away
• File Form 8288-B for a reduced withholding certificate well ahead of closing
• Gather cost-basis documentation: purchase price, improvements, selling costs
• Plan your cash flow assuming funds may be held until you file your return

---

The Bottom Line

FIRPTA isn't a reason to avoid international transactions — they happen all the time in DFW, and the contracts and title companies here are built to handle them. It is a reason to plan ahead, build the right team, and respect the line between real estate advice and tax advice.

If you're navigating a DFW transaction with a foreign buyer or seller, I'm happy to help you structure the deal, coordinate with the title company, and connect you with the right tax and legal professionals to handle the FIRPTA-specific pieces. That's how these closings go smoothly.