FIRPTA Explained: What Foreign Sellers Need to Know When Selling U.S. Real Estate

Selling property in Hawaii is an exciting step, but for foreign sellers, it’s important to be aware of an additional federal requirement that can significantly affect your closing costs: FIRPTA, the Foreign Investment in Real Property Tax Act.

At Living Maui Real Estate, we believe in keeping our clients fully informed. Here’s what you need to know about FIRPTA, exemptions, and how it may impact your sale.

FIRPTA Explained: What Foreign Sellers Need to Know When Selling U.S. Real Estate

What is FIRPTA?

FIRPTA requires that when a foreign person sells real property in the United States, the buyer must withhold 10% to 15% of the sales price and remit it to the IRS within 20 days of closing.

This withholding is not an extra tax—it is an estimate of the federal capital gains tax that may be owed. The final tax liability is determined when the seller files their U.S. tax return.

FIRPTA will be coupled with HARPTA totaling 22.25% Withholding Tax.

Who Is Responsible for FIRPTA Withholding?

Escrow – Under the standard Hawaii Association of REALTORS® purchase contract, escrow is required to withhold and remit the FIRPTA amount unless the seller provides an approved exemption certificate.
Seller – Must prove whether an exemption applies and provide the necessary documentation.
Buyer – Legally responsible for ensuring the proper amount is withheld and remitted to the IRS.

What Percentage Is Withheld?

The FIRPTA withholding rate depends on two factors:

Sales Price: 10% or 15% of the sales price.
Buyer Intent: If the buyer or a member of their family intends to use the property as a primary residence, the lower withholding rate may apply

Are There Exemptions to FIRPTA?

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Qualifications for an Exemption:

Yes, exemptions may apply under certain conditions, such as:

If the buyer (or their family) has definite plans to occupy the property as a primary residence for at least 50% of the number of days the property is used during each of the first two years after transfer.
If the transaction qualifies for a specific waiver approved by the IRS.
If the Foreign Seller also has US dual citizenship, an exemption may apply.

To secure an exemption, proper forms and supporting documentation must be submitted and approved before closing.

Why FIRPTA Matters for Sellers

For foreign sellers, FIRPTA can represent a significant upfront withholding. For example, on a $1,000,000 sale, the required withholding could be $100,000 to $150,000. While this is credited toward the final tax liability, sellers must plan ahead to avoid cash flow challenges at closing.

Key Takeaways

FIRPTA requires buyers to withhold 10–15% of the sales price when purchasing from a foreign seller.
Sellers are responsible for proving exemptions; buyers are responsible for ensuring compliance.
Withholding must be submitted to the IRS within 20 days of closing.
Planning with escrow, your Realtor®, and a tax advisor can help minimize surprises and maximize your net proceeds.
FIRPTA can be coupled with HARPTA, which would then add up to a 22.25% withholding.
FIRPTA refund will need to be filed at the end of the tax year and there is not an early waiver. To receive your Withholding refund, it can take a year or longer.

Navigating HARPTA and FIRPTA Withholdings for Canadian Sellers in Maui

At Living Maui Real Estate, Owner and Principal Broker Kimberly Drechsel prides herself on transparency and providing clients with the necessary documentation upfront. Whether you are buying or selling, Kimberly guides clients step by step through the process, ensuring there are no surprises at closing.

One of the most common situations we see involves our Canadian sellers navigating the complexities of U.S. real estate tax withholdings. Two important terms to understand are HARPTA (Hawaii Real Property Tax Act) and FIRPTA (Foreign Investment in Real Property Tax Act):

HARPTA Withholding Refund – Sellers can usually file for their withholding refund almost immediately after closing.
FIRPTA Withholding Refund – Unlike HARPTA, FIRPTA refunds must be filed in the following tax year. For example, if you close in January, you will need to wait until the next calendar year to apply for your refund.

This timeline can have a big impact on your financial planning, especially if you are selling property in Lahaina, Kāʻanapali, Kapalua, Napili, or Kahana. Knowing the differences between HARPTA and FIRPTA helps Canadian and other foreign investors prepare in advance.

At Living Maui Real Estate, we understand how overwhelming these regulations can feel. That’s why we work closely with sellers, CPAs, and escrow officers to make the process as seamless as possible.

Disclaimer: This article is for informational purposes only and is not intended as legal, financial, or tax advice. Please consult a qualified tax professional or advisor for guidance specific to your situation.