FIRPTA Withholding Exemption for Residential Property Buyers Under $300,000

What is FIRPTA?

The Foreign Investment in Real Property Tax Act, widely known as FIRPTA, is a U.S. tax law enacted in 1980 to address concerns about foreign investors avoiding taxes on the sale of U.S. real estate. Under FIRPTA, when a foreign person sells U.S. real property, the buyer is required to withhold a percentage of the sale price typically 15% to ensure that any tax due is collected. This amount is sent to the Internal Revenue Service (IRS) as a form of tax withholding.

FIRPTA serves as a protective mechanism for the U.S. government to capture capital gains tax owed by non-resident alien sellers. This withholding is not the actual tax but rather a prepayment or deposit. The foreign seller may still need to file a U.S. tax return and claim a refund if the withholding exceeds their tax liability.

This law is a key consideration in any cross-border property transaction in the United States, and it applies broadly unless a specific exemption is claimed.

Why it matters in U.S. real estate transactions

For American buyers and sellers involved in international transactions, FIRPTA can significantly impact the process and cost of buying or selling a home. It adds an administrative burden and often slows down closings due to the need for compliance and documentation.

However, an important exemption can eliminate this burden for many typical residential transactions especially when properties are priced modestly and intended for personal use. This exemption can save buyers thousands in withheld funds and streamline the purchasing process. Understanding whether this exemption applies is crucial for avoiding unnecessary withholdings or IRS complications.

Key Rule Update for Buyers

The $300,000 Price Threshold

One of the most advantageous provisions under FIRPTA pertains to properties sold for $300,000 or less. When the purchase price does not exceed this threshold, the transaction may be exempt from the usual FIRPTA withholding requirement provided certain criteria are met.

This $300,000 benchmark is significant because it applies to a large number of residential properties across the United States, especially in suburban or rural areas where home prices remain relatively affordable. Buyers in this bracket should be particularly aware of the opportunity to bypass FIRPTA’s withholding rules.

It’s important to note that the price threshold refers strictly to the actual purchase price. If the agreed sale amount exceeds $300,000 by even one dollar, the exemption no longer applies, and the full withholding rule could kick in unless another exemption is claimed.

Primary Residence Requirement Explained

To qualify for the FIRPTA exemption on properties sold at or below $300,000, the buyer (or a member of the buyer’s family) must intend to live at the property for at least 50% of the time during the first two years following the purchase.

This means the home must serve as a primary residence not a vacation rental or investment property. The requirement focuses on actual occupancy, not just ownership. For example, if the buyer purchases a home with plans to rent it out full-time, the exemption would not apply.

Instead, the buyer must plan to physically reside at the property for more than half the days during each of the first two years. In practical terms, that equates to living there for at least 183 days per year, averaged over two years. If a family member such as a spouse, child, or parent plans to meet this condition instead of the buyer, the exemption can still be valid.

Eligibility Criteria for Exemption

Buyer Must Be a U.S. Citizen or Resident

The FIRPTA withholding exemption is only available to buyers who are U.S. citizens or lawful residents. This means the buyer must either hold U.S. citizenship or a valid residency status such as a green card or other long-term visa allowing legal residency.

This condition is non-negotiable. Foreign buyers even if they intend to live in the property cannot claim this exemption. The law specifically requires that the purchaser be someone with a tax and residency status tied to the United States, which aligns with the purpose of FIRPTA to ensure foreign parties do not escape taxation.

If a foreign national is a co-buyer with a U.S. citizen, the IRS may still require withholding unless it’s clear the U.S. buyer meets the occupancy and citizenship requirements. Proper legal advice is crucial in these joint ownership scenarios.

Occupancy Rule: Half-Time Residency Condition

The linchpin of the FIRPTA exemption lies in the buyer’s intent to use the property as a personal residence. The IRS uses the 50% occupancy rule to determine if the home will indeed serve that purpose. While the rule appears straightforward, it requires documented intent and follow-through.

The buyer must plan to reside at the property for the majority of the time over a two-year window. This is calculated per calendar year, not cumulatively. Days of actual use should ideally be documented through utility bills, mail records, or other occupancy indicators to prove compliance if ever audited.

Failure to meet this residency obligation could potentially result in penalties or retroactive tax liabilities. As such, buyers should take this requirement seriously and document their time at the property in case the IRS seeks verification later on.

Applicability to Family Members

Interestingly, FIRPTA’s occupancy rule extends beyond just the buyer themselves. If a direct family member of the buyer such as a spouse, child, or parent intends to reside in the home under the same half-time condition, the exemption still applies.

This provides flexibility, especially in cases where parents buy a home for their children to live in during college, or a child purchases a home for an aging parent. So long as the home will serve as the primary residence for a qualifying family member, and the $300,000 purchase price threshold is not exceeded, FIRPTA withholding can be waived.

Buyers should be prepared to sign an affidavit or declaration affirming their intended use of the property to meet this condition.

Implications for Sellers and Buyers

Impact on Foreign Sellers

Foreign sellers involved in U.S. real estate transactions often face significant hurdles due to FIRPTA. For them, the 15% withholding can be a sizable amount, especially in modest property deals. For example, on a $300,000 home, that’s $45,000 withheld until the IRS processes the seller’s tax return.

However, if the buyer meets the exemption criteria under the $300,000 rule, foreign sellers benefit significantly as no withholding occurs at all. This makes properties priced at or below this threshold more attractive to foreign investors, particularly in markets where they might struggle to sell quickly.

That said, foreign sellers still bear the burden of ensuring that all documentation is accurately processed, and that the buyer legitimately qualifies for the exemption. They may require affidavits and legal declarations to protect themselves from IRS audits or penalties down the road.

The transaction still must be reported to the IRS, and the seller must ensure the deal is properly structured to avoid being held liable for unpaid taxes due to a buyer’s misrepresentation.

Buyer Responsibilities and Certification

Buyers looking to take advantage of this FIRPTA exemption must do more than simply intend to live in the home they need to affirm it formally. The IRS generally requires a written statement from the buyer, often referred to as a “FIRPTA affidavit,” asserting that the property will be used as a residence.

This certification must be signed under penalty of perjury and retained by the settlement agent, escrow company, or closing attorney for five years. It does not get submitted to the IRS but must be available upon request. The affidavit includes the purchase price, the intention to use the property as a personal residence, and identification details of the buyer and seller.

Failure to retain this affidavit can lead to legal complications if the IRS investigates. The buyer could become liable for the 15% withholding that was supposed to be collected and remitted.

Buyers must also understand that the intent to occupy the property is a commitment that can have tax consequences if not fulfilled. If unforeseen events prevent the buyer from residing in the home as planned, they should seek legal advice immediately to mitigate any tax risk.

Legal and Tax Expert Opinions

Commentary from Real Estate Attorneys

Real estate lawyers across the U.S. stress the importance of proper documentation when claiming the FIRPTA exemption. Many recommend that buyers engage experienced attorneys or title companies to handle the paperwork, especially in cases involving foreign sellers.

Attorneys point out that while the exemption appears straightforward, mistakes are common. For instance, buyers might overlook the fact that “intention to reside” must be legally documented, not just assumed. Others may misunderstand who qualifies as a “family member” for occupancy purposes or forget to retain their affidavit properly.

Experts warn that FIRPTA-related disputes are becoming more common, especially as international real estate activity increases. To stay protected, they urge both buyers and sellers to ensure all steps are legally and transparently executed.

Additionally, legal professionals advise buyers to carefully track their occupancy or that of the family member during the two-year period. Keeping a simple log of residence dates, along with supporting documents like bills or mail, can serve as crucial proof if ever needed.

Advice from Tax Professionals

From a tax advisor’s perspective, the FIRPTA exemption for properties under $300,000 is a valuable tool but one that must be navigated cautiously. Accountants note that many buyers mistakenly believe that if they fall under the $300,000 mark, they’re automatically exempt. In reality, they must meet the occupancy and residency requirements, and sometimes buyers forget or overlook these conditions.

Tax experts also emphasize that this exemption does not eliminate other tax obligations. While the buyer may avoid FIRPTA withholding, the seller still has an obligation to file a U.S. tax return and report the gain. If the seller fails to file, the IRS could impose penalties or revisit the exemption eligibility.

Professionals recommend that both parties in the transaction consult with a CPA or tax attorney well before closing. This can ensure all tax planning is handled efficiently, and there are no surprises after the transaction is finalized.

Some accountants go a step further, encouraging buyers to consider other IRS exemptions or tax strategies especially when working with properties near the $300,000 threshold, where a slight price fluctuation can make a big difference.

Practical Scenarios and Case Studies

Case Study: First-Time Homebuyer in Florida

Let’s take a real-world scenario to illustrate how this exemption plays out. Jane, a U.S. citizen and first-time homebuyer in Orlando, Florida, purchases a condominium for $285,000 from a Canadian seller. The condo is in a quiet residential neighborhood and is intended to be her primary residence.

Since Jane meets the residency requirement and plans to live there full-time, and the purchase price is under $300,000, the FIRPTA withholding does not apply. Her attorney prepares a FIRPTA affidavit affirming her intent to use the condo as a primary residence, and this document is retained by the closing agent.

Jane moves in immediately after closing and continues to live there consistently. The Canadian seller avoids having 15% withheld at closing, and Jane isn’t burdened with IRS withholding processes streamlining the entire transaction.

This case highlights how the exemption benefits both parties when all conditions are clearly met.

Case Study: Investment Purchase Gone Wrong

In contrast, consider Tom, a U.S. resident who buys a $295,000 townhouse in Texas from a foreign national. Tom tells his realtor he intends to rent out the property as an Airbnb investment. However, the property qualifies under the $300,000 rule, and the agent mistakenly assumes the FIRPTA exemption applies without confirming the intended use.

No withholding is collected, and Tom signs an affidavit stating the home will be his primary residence. Months later, the IRS audits the seller, discovers the truth, and concludes the exemption was claimed under false pretenses. Tom becomes liable for the full 15% withholding, including interest and penalties.

This case underscores the importance of truthfully certifying occupancy intentions and the legal implications of misrepresenting residency plans.

How to Ensure FIRPTA Compliance

Steps Buyers Should Take

To avoid any legal or financial pitfalls, buyers looking to claim the FIRPTA exemption should follow these steps:

Confirm the Purchase Price: Ensure the final agreed amount is $300,000 or less. Even a minor overage disqualifies the exemption.

Understand the Occupancy Rule: Be absolutely clear on what “residing more than 50% of the time” entails over the first two years.

Complete a FIRPTA Affidavit: Fill out and sign the affidavit with the help of your real estate attorney. Make sure all parties, including the escrow agent, retain a copy.

Consult Legal and Tax Advisors: Before signing, check with professionals to ensure all your bases are covered especially if a family member will reside in the property.

Maintain Records: Keep utility bills, lease agreements (if applicable to family members), and other occupancy evidence in case of an audit.

Following these steps ensures smooth closing, compliance with IRS requirements, and financial protection in case of later inquiries.

Documents and Proofs Needed

While the IRS does not require buyers to submit documentation upfront, keeping the following documents is highly advisable:

• FIRPTA Affidavit signed under penalty of perjury
• Proof of U.S. citizenship or permanent residency (e.g., passport, green card)
• Purchase agreement showing price
• Utility bills, lease agreements, or insurance documents showing occupancy
• Photographs and personal correspondence proving residence, if needed

Having these on hand can be the difference between a quick resolution and a costly audit.

Conclusion

The FIRPTA withholding exemption for properties sold at $300,000 or less is a valuable but often misunderstood provision in U.S. real estate law. It’s a financial lifesaver for buyers who plan to use their new home as a primary residence and a relief for foreign sellers who can avoid major withholdings. However, it comes with strict conditions that require careful attention.

Buyers must ensure they meet all criteria: from citizenship status to genuine occupancy intentions. Proper documentation and legal advice are not just helpful they’re essential. With due diligence, buyers and sellers can both benefit from a smoother, less costly transaction.

Understanding FIRPTA isn’t just about following the law it’s about protecting your investment, avoiding IRS headaches, and ensuring a hassle-free home buying journey. For more information about financing visit Nadlan Capital Group.

FAQs

1. Can I rent out the property and still qualify for the FIRPTA exemption?

No. The exemption requires that the buyer or a family member reside at the property for more than half of the first two years. Rental use disqualifies the exemption.

2. Does the exemption apply if only part of the property is occupied (like a duplex)?

It depends. If the buyer lives in one unit and rents out the other, they may still qualify, provided they meet the 50% occupancy rule based on days lived.

3. What happens if I move out before two years are up?

If the IRS discovers that the residency condition wasn’t met, the buyer may become liable for the 15% withholding, plus interest and penalties.

4. Can a student living in the home qualify as a “family member”?

Yes, if the student is an immediate family member (e.g., son, daughter), their residence can fulfill the occupancy requirement.

5. Is a notarized FIRPTA affidavit always required?

It’s highly recommended. While not mandatory to be notarized in every state, a notarized affidavit strengthens the legal standing of the buyer’s claim.