The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires the buyer of US real property from a foreign seller to withhold a portion of the sale proceeds and remit it to the IRS at close. The withholding is not a tax — it is a prepayment against the foreign seller's actual US tax liability on the sale. The foreign seller files a US tax return after the sale, calculates the actual tax owed, and either receives a refund of excess withholding or pays additional tax owed beyond the withholding. The mechanics are standard, the cost is real, and most foreign owners of LA multifamily learn about FIRPTA later in the sale process than they should.
The structural fact every foreign owner needs to know is that FIRPTA withholding interrupts the cash proceeds at close. A foreign seller who expects to net $4M from a sale and hasn't planned for FIRPTA will find $600,000 withheld at the closing wire and the actual net cash proceeds reduced accordingly. The withholding eventually reconciles through the tax return, but the cash gap can be many months, which complicates the seller's deployment of the proceeds.
The default FIRPTA withholding rate is 15% of the gross sale price (not 15% of the gain — 15% of the entire gross sale price). For a foreign seller transferring a $5M building, the default withholding is $750,000.
A reduced 10% rate applies to sales of residential property under $1M where the buyer intends to use the property as a personal residence. Multifamily sales rarely qualify for the 10% rate because the residential-use requirement is unlikely to be met by an investor-buyer.
A complete exemption from FIRPTA withholding applies when the sale price is $300,000 or less and the buyer plans to use the property as a personal residence. Effectively never applicable to LA multifamily.
The 15% rate on the gross sale price is the operating reality for almost every foreign seller of an LA apartment building.
The withholding amount can often be reduced from the default 15% of gross to an amount closer to the actual tax owed through one of two procedures.
Withholding certificate (Form 8288-B). The seller files Form 8288-B with the IRS before the sale, requesting a certificate that authorizes reduced or zero withholding based on the actual tax liability on the transaction. The IRS reviews the request and issues a withholding certificate that the buyer can rely on at closing.
The benefit: the cash gap is meaningfully reduced. A seller whose actual tax liability is $250,000 on a $5M sale can, through the withholding certificate process, reduce the closing withholding from the default $750,000 to approximately $250,000.
The cost: timing. The IRS typically takes 90 days from filing to issue a withholding certificate. The seller should file as early as possible in the sale process — ideally before listing, certainly before the purchase contract is signed. A withholding certificate filed at the last minute will not be approved in time for closing.
Withholding certificate at close with refund post-close. If the timing of the sale doesn't allow for pre-close approval of the withholding certificate, the buyer withholds the full 15% at closing and the seller files for a refund through their post-sale US tax return. The cash gap is the same as the default structure — full 15% withheld — but the seller eventually recovers the excess.
The withholding certificate path is meaningfully better when the timing supports it. The certificate is the operational mechanism for foreign sellers to capture sale proceeds at close rather than waiting through the tax-return cycle.
The withholding obligation legally rests on the buyer, not on the seller, the title company, or the escrow officer. The buyer is the withholding agent. If the buyer fails to withhold, the buyer is personally liable for the unwithheld amount plus interest and penalties.
In practice, the title company or escrow officer administers the withholding on the buyer's behalf. The buyer's pre-closing checklist includes:
The seller's job is to provide accurate documentation of foreign status, to obtain any applicable withholding certificate, and to coordinate with the buyer's counsel and escrow on the documentation flow.
California layers its own withholding regime on top of FIRPTA. The California Real Estate Withholding requirement (Form 593) applies to sales of California real property regardless of the seller's residence status, with default withholding at 3.33% of the gross sale price (or 12.3% of the gain if the seller elects, which is sometimes lower).
A foreign seller of an LA apartment building therefore faces both FIRPTA (15% of gross sale price, federal) and California Real Estate Withholding (3.33% of gross sale price or 12.3% of gain, state). The total default withholding can approach 18% of gross sale price.
Both withholdings reconcile through the seller's tax returns, but the cash gap at close is real and is the sum of both. A $5M sale to a buyer who is FIRPTA-compliant and California-withholding-compliant produces a closing wire to the seller that is roughly $4.1M, with the balance held by IRS and FTB until the seller's returns are processed.
A 1031 exchange by a foreign seller is operationally more complicated than a domestic 1031, primarily because of the FIRPTA withholding interaction. Default mechanics: the buyer withholds 15% of the gross sale price at close on the relinquished property, which means the qualified intermediary holding the exchange funds receives less than the gross sale price. The replacement property must be acquired with the reduced exchange funds, potentially limiting the replacement options.
A withholding certificate filed pre-close that recognizes the 1031 deferral and authorizes zero or reduced withholding solves this. Form 8288-B filings citing a planned 1031 exchange are routine and routinely approved when the exchange is properly structured. Foreign sellers planning to 1031 should file the withholding certificate as early as possible in the sale process — ideally before the listing date.
The most common structures that reduce or simplify FIRPTA on LA multifamily sales:
Pre-close withholding certificate. As discussed. The single most impactful operational step for foreign sellers.
Treaty-based reductions. Some US bilateral tax treaties reduce or modify the tax owed by foreign sellers on US real property gains. The treaty position is rarely a complete exemption but can reduce the effective rate. Treaty positions require analysis by international tax counsel — they are not automatic and they vary by the seller's country of residence.
US LLC or corporate holding structures. Some foreign owners hold US real property through US-domiciled entities, which can change the FIRPTA mechanics. The structure has to be in place before the sale; restructuring at the time of sale is generally not effective for FIRPTA purposes.
These are entity-structure questions that require pre-listing planning with international tax counsel. They are not last-minute closing adjustments.
Engage US-side tax counsel early — ideally before listing the property, certainly before signing a purchase contract. The FIRPTA timeline, the California withholding timeline, and the 1031 timeline (if applicable) all interact, and the choices made at the start of the sale process determine the seller's cash position at close.
The other thing I tell foreign sellers is that the withholding cost is recoverable but the time delay is real. A foreign seller who needs deployable cash at close needs the withholding certificate. A foreign seller who can wait through the tax-return cycle for a refund has less urgency about the certificate but still benefits from filing one.
FIRPTA is administrative, not punitive. The withholding is a prepayment, not a tax. Most foreign sellers ultimately reconcile to their actual tax liability with refunds for excess withholding or additional payment for shortfalls. The operational issue is the cash timing — the gap between the closing wire and the eventual tax-return reconciliation. Foreign sellers who plan for FIRPTA early in the sale process manage the cash timing on their terms. Foreign sellers who learn about FIRPTA at the closing table manage it on the IRS's terms. The pre-listing tax planning conversation is short and consequential.
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Michael Sterman is Senior Managing Director Investments at Marcus & Millichap, specializing in Los Angeles multifamily transactions.
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