The Interplay between the 1031 Exchange and the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
by Maura Snabes, Esq., CES, NTP
March 2025
The IRS created FIRPTA to assure that foreign owners of assets (like real estate) paid their capital gains taxes when the assets were sold. The Act requires that a portion of the sales price (15%) be withheld by the buyer/settlement agent and paid to the IRS within 20 days of closing on the sale of the real estate, to cover taxes on the gains made on the property. FIRPTA has become more commonplace with the influx of foreign investors in U.S. property.
It is commonly believed that the amount withheld and sent to the IRS pursuant to FIRPTA requirements is deferred by doing a 1031 Exchange. However, when money is withheld from a 1031 Exchange, it creates fully taxable "boot" that cannot be invested. Since the money is not deposited with the Qualified Intermediary and reinvested into a qualified replacement property, this leads to capital gains taxes being owed
Given the foregoing, how does a seller avoid taxation of the FIRPTA withholding in a 1031 Exchange? There are a number of strategies that may reduce or eliminate the FIRPTA withholding requirements. NOTE: Always consult with your tax and legal advisors first.
- Add funds to the Exchange
This may be the easiest method to accomplish deferment, if a taxpayer has the cash available. The taxpayer can advance additional funds out of pocket to cover the withholding requirement, allowing the total amount of the proceeds to be reinvested and deferring taxes on that amount.
- Perform a same-day, simultaneous exchange with No Boot.
A simultaneous exchange with no boot would require two parties swapping properties. As long as the 1031 exchange requirements are met for replacing the equity and loan amounts from the relinquished property on the replacement property, the foreign investor would likely qualify. To ensure that the buyer does not withhold funds, the foreign seller should file a 1031 Declaration and Notice.
- Request a withholding certificate from the IRS
With (a lot of) advance planning, you can request a Withholding Certificate (IRS Form 8288-B) from the IRS to prevent FIRPTA withholding on the sale. Once the taxpayer has an ITIN or EIN, then they can apply. The approval process can take well over 90 days, so advance planning is a necessity so no closing or 1031 Exchange deadlines are missed.
- Real estate purchased as a home
When the buyer plans to use the property as a home/residence, the withholding percentage is reduced: No withholding requirement for properties valued at $300,000 or less; properties valued between $300,001 and $1,000,000, require that 10% be withheld; and above $1,000,000, the general rules apply. To qualify, the buyer or eligible family members must have definitive plans to live in the property at least 50% of the time for the next two years.
Bottom Line: For foreign investors aiming to achieve a seamless and fully successful 1031 tax-deferred exchange, pre-planning is not just a good idea—it is essential.
Maura is a licensed attorney and a Certified Exchange Specialist. She is a founder of Corporate Exchange Services (CXS), established in 1995.
CXS is a member of the Federation of Exchange Accommodators (FEA), the industry's leading professional trade organization.
Corporate Exchange Services handles forward, reverse, and improvement exchanges throughout the U.S.
Regardless of the transaction complexity, CXS has the expertise and personal approach needed to successfully complete even the most complex 1031 exchange.
Contact msnabes@corp1031.com to get started
