The FIRPTA $300,000 Residence Exemption: A $290,000 Sale Where the Buyer Withholds $0
When a foreign person sells U.S. real estate, the buyer normally has to withhold 15% of the full sale price under FIRPTA. But there's a clean off-ramp: if the buyer is an individual who will use the home as a residence and the amount realized is $300,000 or less, withholding drops to zero. Here's a $290,000 sale that ends with $0 withheld — and the $5,000 mistake that wipes the exemption out entirely.
The rule in one breath
FIRPTA (the Foreign Investment in Real Property Tax Act) makes the buyer — the transferee — responsible for withholding tax when they purchase a U.S. real property interest (USRPI) from a foreign person. The default is 15% of the amount realized, which in most cases is just the gross sales price (cash plus the value of any property transferred plus any liabilities the buyer assumes).
The IRS carves out a specific exception. As the IRS states it plainly: "If one or more individuals acquire U.S. real property for use as a residence and the amount realized (in most cases, the sales price) is $300,000 or less, no withholding is required." (Instructions for Form 8288, IRS.)
That's the entire promise of this article's headline: $290,000 is at or under $300,000, so if the residence test is met, the buyer withholds nothing — and there's no Form 8288/8288-A to file for that purchase.
The deal. Lucía Moreno, a Mexican citizen and nonresident of the U.S., owns a condo in Tampa, Florida. She agrees to sell it to Daniel and Priya Shah, a married couple buying as individuals, for a sale price of $290,000. The Shahs intend to live in the condo themselves.
Step 1 — Is the seller foreign? Yes. Lucía is a nonresident alien, so FIRPTA applies to the disposition. Without an exception, the Shahs would have to withhold.
Step 2 — What's the default withholding? 15% of the amount realized:
$290,000 × 15% = $43,500 would otherwise be sent to the IRS.
Step 3 — Does the residence exception apply? Run the two-part test:
- Price test: amount realized is $290,000 — that is "$300,000 or less." ✓
- Residence-use test: the Shahs (individuals, not an LLC or corporation) have definite plans to occupy the condo as a residence for at least 50% of the number of days it is used by anyone during each of the first two 12-month periods after closing. They'll live there full-time. ✓
Step 4 — The result. Both parts pass. The Shahs sign a written statement (a buyer's residence affidavit) confirming the price and their residence intent. Withholding drops to $0. No FIRPTA tax is remitted, and no Form 8288 is filed for the transaction. Lucía still has to report the gain and settle her actual U.S. tax on a return — the exemption removes the withholding, not her underlying tax obligation.
The number that matters: $43,500 that would have been frozen with the IRS until refund time is instead never withheld at all.
The two-part test, spelled out
The exemption is not "the house is cheap, so no withholding." Both conditions must be true at the same time:
Part 1 — The amount realized is $300,000 or less
"Amount realized" is generally the sales price: cash paid, plus the fair market value of any other property transferred, plus the amount of any liability the buyer assumes or takes the property subject to. $300,000 is a hard ceiling — the IRS does not prorate or scale the exemption.
Part 2 — Individual buyer(s) with residence-use intent
The buyer must be one or more individuals (the exception does not apply when the buyer is a corporation, partnership, trust, or estate). Those individuals must have definite plans to reside at the property. The IRS defines the bright line: the buyer must plan to occupy the property "for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer." (FIRPTA Withholding, IRS.)
Days the property sits vacant are ignored in the math — you compare the buyer's personal-use days against the total days the property is actually used by anyone in each 12-month window. So a buyer who lives in the home for 4 months and rents it out for the other 8 fails Part 2; a buyer who lives there 4 months and leaves it empty the rest of the year can still pass.
Why the buyer, not the seller, carries the risk
This is the part that surprises people. Under FIRPTA the withholding obligation sits on the buyer (transferee). When the buyer chooses to rely on the $300,000 residence exception and withholds nothing, the buyer is also the one on the hook if the exception turns out not to apply.
The IRS is explicit: if a buyer fails to withhold "in reliance upon the exception that the transferee/buyer planned on using the USRPI as a personal residence… the transferee/buyer shall be liable for the failure to withhold" — unless circumstances changed unexpectedly. (FIRPTA Withholding, IRS.)
Practically, that means the buyer can later be assessed the tax they should have withheld, plus interest and penalties, if the residence intent was never genuine or fell apart for reasons the buyer should have foreseen. That's why the buyer signs the residence affidavit personally: they are certifying the facts they're being held to. The seller's foreign status is what triggers FIRPTA, but the seller does not get to "claim" this exemption — only the buyer can, and only the buyer bears the downside of getting it wrong.
The $305,000 trap. Same Tampa condo, same foreign seller. This time the agreed price is $305,000 — just $5,000 over the cap — and the buyers still plan to live there.
Buyers often assume the exemption "covers the first $300,000" and that 15% only applies to the $5,000 overage. That is wrong. The $300,000 figure is a threshold, not a deduction. Once the amount realized exceeds $300,000, the full-exemption door closes:
$305,000 × 15% = $45,750 must be withheld and remitted (unless the $300,001–$1,000,000 reduced-rate rule below applies).
The $5,000 of "extra" price triggered $45,750 of withholding versus $0. If you're negotiating near the line, a price of $300,000 versus $300,001 is the difference between a clean closing and tens of thousands of dollars parked with the IRS.
The middle tier: $300,001 to $1,000,000 drops the rate to 10%
There's a second, less-known relief band. When the property is acquired by the buyer for use as a residence (the same individual-buyer / 50%-of-days test as above) and the amount realized is more than $300,000 but not more than $1,000,000, the rate is not eliminated — it's reduced from 15% to 10%.
The Form 8288 instructions put it directly: "Withholding is required at a reduced rate of 10% in the case of a disposition of a property that is acquired by the transferee for use by the transferee as a residence, and the amount realized for the property is $1 million or less." (Instructions for Form 8288, IRS.) Above $1,000,000, the rate goes back to the full 15% regardless of residence use.
| Amount realized (sale price) | Buyer is an individual using it as a residence? | FIRPTA withholding rate |
|---|---|---|
| $300,000 or less | Yes (50%-of-days test met) | 0% — fully exempt |
| $300,001 – $1,000,000 | Yes (50%-of-days test met) | 10% on the full amount realized |
| Any amount | No residence use (or non-individual buyer) | 15% on the full amount realized |
| Over $1,000,000 | Yes or no | 15% on the full amount realized |
Note the 10% (and the 0%) always applies to the full amount realized — never just the slice over a threshold. A $700,000 residence sale withholds $700,000 × 10% = $70,000, not 10% of a partial amount.
- FIRPTA's default is 15% of the gross sale price, withheld by the buyer when the seller is a foreign person.
- The $300,000 residence exemption drops withholding to $0 when (1) the amount realized is $300,000 or less and (2) an individual buyer has definite plans to use it as a residence for at least 50% of days-used in each of the first two 12-month periods.
- $300,000 is a cap, not a deduction: a $305,000 sale loses the full exemption — it doesn't just tax the overage.
- For residence sales of $300,001 to $1,000,000, the rate is reduced to 10% (still on the full price). Over $1,000,000 it's 15%.
- The buyer claims and signs for the exemption, and the buyer is liable if the residence claim doesn't hold up.
- Removing withholding does not remove the seller's tax — the foreign seller still reports and pays actual U.S. tax on the gain via a U.S. return.
Before you rely on it: a short checklist
- Confirm the seller is actually foreign. A non-foreign seller affidavit, not the residence exemption, is the right tool when the seller is a U.S. person.
- Confirm the buyer is an individual. Buying through an LLC or corporation breaks Part 2 even at $290,000.
- Get the residence intent in writing. The buyer signs a dated statement of the price and residence plans; keep it with closing documents.
- Watch the closing math. Seller credits, assumed liabilities, and personal-property allocations can push the amount realized over $300,000 even when the headline price looks under.
- Get advice on borderline or high-dollar deals. Withholding certificates (Form 8288-B) can reduce withholding to the seller's actual expected tax when the standard rate over-withholds.
FAQ
Does the $300,000 FIRPTA exemption apply per buyer or per property?
It's tested on the single transaction: the total amount realized for the property must be $300,000 or less, and one or more individual buyers must intend to use it as a residence. Splitting a $400,000 purchase between two buyers does not create two $300,000 exemptions — the amount realized for the property is what counts.
Is $300,000 a cap or a deduction?
A cap. If the amount realized exceeds $300,000 by even $1, the full exemption is gone. A $305,000 residence sale doesn't withhold 15% on just the $5,000 over — it falls into the next tier (10% for $300,001–$1,000,000, on the full price) or 15% if the residence test isn't met.
What is the "50% of days" residence-use test?
The buyer must have definite plans to occupy the property for at least 50% of the number of days it is used by anyone during each of the first two 12-month periods after closing. Vacant days are excluded from the count. Renting it out for most of the year fails the test (IRS).
Who is liable if the residence claim turns out to be false?
The buyer (transferee). The IRS holds the buyer liable for the failure to withhold if they relied on the residence exception and it didn't apply, unless circumstances changed unexpectedly. That's why the buyer, not the seller, signs the residence affidavit.
When does the 10% rate apply instead of full exemption or 15%?
When the property is acquired by an individual buyer for use as a residence and the amount realized is more than $300,000 but not more than $1,000,000. Above $1,000,000, the rate is 15% regardless of residence use (Instructions for Form 8288, IRS).
Does the exemption mean the foreign seller owes no U.S. tax?
No. The exemption only removes the buyer's withholding obligation. The foreign seller still must report the disposition and pay actual U.S. tax on any gain by filing a U.S. income tax return. Withholding is a prepayment mechanism, not the final tax.
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