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If you have ever bought or sold real estate in Arizona, there is a good chance you have seen the word “FIRPTA” pop up somewhere in the paperwork. Most people skim right past it. I understand why. It sounds like one of those overly complicated tax acronyms that could never apply to a normal residential transaction.
The problem is that FIRPTA absolutely can affect a regular home sale. In some situations, it can create major delays, unexpected stress, and serious financial consequences for buyers if it gets missed.
A few years ago I had a transaction where FIRPTA became an issue just days before closing. It was one of those situations that reminded me why these disclosures matter so much, even when everyone assumes the transaction is straightforward.
What Is FIRPTA?
FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980. In simple terms, it is a federal law that allows the IRS to collect taxes when a foreign person sells U.S. real estate.
When FIRPTA applies, the buyer is generally responsible for withholding a portion of the seller’s proceeds at closing and sending that money to the IRS. Right now, the standard withholding amount is often 15% of the sales price, although exceptions can apply depending on the situation.
That is the part many people do not realize: The buyer is typically considered the withholding agent. If the required funds are not withheld and sent to the IRS correctly, the buyer can end up liable for the unpaid taxes, penalties, and interest.
Why FIRPTA Matters in Southern Arizona
In Tucson and Southern Arizona, we see buyers and sellers from all over the world. Between second homes, investment properties, retirees relocating here, and inherited properties, FIRPTA questions come up more often than people think.
Most transactions move smoothly because the issue gets identified early. That is why FIRPTA appears in multiple places throughout the transaction process, including:
- The listing agreement
- The Seller’s Property Disclosures
- The purchase contract
- Title company documentation
The goal is to catch potential issues before closing day.
Sometimes, though, the ownership history is more complicated than anyone realized.
A Real-Life FIRPTA Situation I Saw
A few years ago I represented a buyer in a transaction that looked completely normal at first. We were about a week away from closing when the title company discovered that the property had been inherited from a foreign owner.
That immediately triggered additional FIRPTA review.
The title company had to work quickly with the appropriate parties to determine whether withholding requirements applied and whether a taxpayer identification number was needed for the transaction. We ended up pushing closing back a couple of weeks while everyone gathered the proper documentation and worked through the IRS requirements.
Thankfully, the title company caught the issue before closing.
If nobody had identified the FIRPTA concern, my buyer could have faced a very serious situation later if the IRS determined taxes should have been withheld but were not. That is exactly why these questions matter, even when they seem repetitive during the transaction process.
Who Counts as a Foreign Seller?
This is where things can get confusing.
A foreign seller does not always mean someone who lives overseas full time. FIRPTA rules can involve individuals, partnerships, corporations, trusts, and estates. Ownership structures also matter.
In some cases, inherited property or property held in an entity can create additional questions that require review by the title company or a tax professional.
That is why it is important for sellers to answer FIRPTA questions carefully and honestly from the beginning of the transaction.
Are There Exceptions to FIRPTA?
Yes. Not every transaction involving a foreign seller requires withholding.
For example, there are certain residential exemptions tied to occupancy and purchase price requirements. There are also situations where sellers can apply for reduced withholding through the IRS.
However, determining whether an exemption applies is not something buyers or agents should casually guess on during escrow. The title company, CPA, and sometimes a real estate attorney usually help navigate those decisions.
FIRPTA Forms Buyers and Sellers May See
When FIRPTA withholding applies, the IRS generally requires:
- Form 8288
- Form 8288-A
These forms report and transmit the withholding funds to the IRS. Foreign sellers may also need a TIN or ITIN in order to complete the process properly or request reduced withholding.
Again, this is one reason delays can happen if FIRPTA questions surface late in the transaction.
FIRPTA Is Not Something to Ignore
I know FIRPTA can sound intimidating, especially for buyers who never expected to deal with international tax law during a home purchase in Tucson.
The good news is that most transactions work out just fine when everyone addresses the issue early and the right professionals stay involved. Still, this is one of those areas where details matter. Buyers should understand that they can carry liability if withholding requirements get missed. Sellers should be upfront about ownership history and residency status from the start. And everyone should pay attention when title raises questions, even if it feels like “just another form.”
In real estate, the transactions that seem simple on the surface sometimes have the most layers underneath.
Before You Sign Another Stack of Escrow Paperwork
One thing I have learned after years in real estate is that small disclosures can have very big consequences later. FIRPTA is a perfect example.
Most buyers and sellers will never personally deal with a withholding issue. But when FIRPTA does apply, catching it early can save everyone weeks of stress, delayed closings, and potential IRS problems down the road.
That is why I always encourage my clients to ask questions during escrow instead of assuming every disclosure is routine paperwork. Sometimes those “boring” pages end up being the most important ones in the file.
Here’s a link to the IRS website on FIRPTA: Click here!
Have questions on living in Southern Arizona? Give me a call or text at (541) 521-0145, or click here to go to my contact page.
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