FIRPTA and the Mexican Seller: US Tax Withholding on Real Estate Dispositions by Foreign Persons

March 11, 2026

Current as of: September 6, 2026. This article reflects legal and regulatory authorities, administrative guidance, and market practice available as of the date above. Rules, thresholds, agency guidance, and administrative practice may change after that date, and the analysis may not apply the same way to every set of facts.

By Rene Hinojosa, Principal, Hiro Law. Licensed in Texas, California, and Mexico.

For Mexican nationals and family offices selling U.S. real estate, the closing process includes a withholding obligation that can materially reduce net proceeds if not planned for in advance. A foreign seller of U.S. real property generally faces withholding obligations that operate independently of the seller's final U.S. income tax liability. The FIRPTA and Section 1445 rules can materially affect closing proceeds, timing, and reporting, and they should generally be analyzed together with any parallel Mexican tax consequences.

Mexico itself may also tax the gain from US real property disposition. The interplay between US withholding and Mexican income taxation, together with any foreign tax credit relief available under applicable Mexican domestic law and the US-Mexico treaty's double-taxation relief provisions, requires coordination across both jurisdictions. US withholding does not discharge any applicable Mexican reporting or payment duties. Assess each country’s remaining obligations separately.

Critical point on Mexican tax exposure: A Mexican tax resident disposing of U.S. real property must assess Mexican reporting and tax under applicable domestic rules, including foreign-tax credits and any available relief; additional Mexican cash tax is not automatic. Mexico taxes its residents on worldwide income. Any applicable Mexican filing duties are separate from the U.S. withholding mechanics discussed below.

Key Points

• 15% withholding applies by default: IRC §1445 generally requires the buyer to withhold 15% of the amount realized when purchasing a U.S. real property interest from a foreign person, subject to limited exceptions including the residence exception in IRC §1445(b)(5) if its statutory requirements are satisfied.

• Withholding is distinct from tax liability: The amount withheld may exceed or fall short of the seller's actual US tax on gain; excess withholding generates a refund claim, while under-withholding does not eliminate the seller's filing and payment obligations.

• Form 8288-B may reduce withholding, but timing should be planned conservatively. A seller may apply for a withholding certificate where the statutory and regulatory requirements are satisfied, but IRS processing timing is not fixed and should be verified against current practice rather than assumed from a standard estimate.

• USRPHC status can extend FIRPTA to corporate interests: The test compares the fair market value of U.S. real property interests with 50% of the combined value of U.S. real property interests, foreign real property interests and other trade-or-business assets, applying statutory ownership rules. Stock treatment also depends on the lookback period and shareholder-specific exceptions, including regularly traded stock thresholds.

• The buyer's failure to withhold creates serious consequences: If the buyer fails to withhold, the buyer may become liable to the IRS for the unpaid withholding plus penalties and interest; the seller remains liable for U.S. income tax, and the availability of any Mexican foreign tax credit depends on Mexican domestic law, treaty application, documentation, and the amount of qualifying U.S. income tax actually paid.

• US-Mexico treaty Article 13 grants both countries taxing rights: Article 13 is symmetric: both countries have primary taxing rights on gains from real property located in their territory. The treaty permits source-country taxation of real-property gains. Applicable foreign-tax credits can mitigate double taxation, subject to each taxpayer’s eligibility, credit limits and recognition timing; full relief is not guaranteed.

• Coordination with Mexican tax counsel: Coordinate applicable US filing, withholding and depreciation-recapture rules with Mexican tax reporting and any treaty positions. Identify deadlines and consequences of noncompliance separately in each jurisdiction. Dual-jurisdiction compliance requires attention to both filing deadlines.

I. FIRPTA and Section 1445 Basics

A. The statutory framework

IRC Section 897 establishes that a foreign person's gain from disposing of a US real property interest (USRPI) is taxable as income effectively connected with a US trade or business. This means the foreign seller is taxed as if the gain were effectively connected with a US trade or business; the applicable tax rate depends on the character of the gain, so long-term capital gain treatment may still apply where available, subject to recapture and other special rules. Section 1445 operationalizes this rule by imposing a withholding requirement on the buyer.

B. Definition of USRPI

A USRPI includes real property located in the United States and, subject to statutory exceptions, an interest in a domestic corporation that is or was a US real property holding corporation. Stock that is regularly traded on an established securities market may be excluded only if the transferor's ownership stayed within the applicable threshold during the relevant testing period. The definition includes land, buildings, improvements and leaseholds. Indirect interests through partnerships or trusts require their own statutory analysis; §§897(g), 864(c)(8) and 1446(f) address distinct partnership gain and withholding questions. For Mexican investors in US real estate funds, interests in entities that hold US real property can raise FIRPTA issues, but partnership interests are analyzed under rules distinct from the USRPHC stock rules.

C. The withholding obligation

When a foreign person disposes of a USRPI, the transferee (buyer) must withhold and remit 15% of the amount realized. The "amount realized" includes cash proceeds, debt relief, and the fair market value of property received in exchange. This withholding is mandatory absent an exception or a withholding certificate from the IRS.

II. Withholding Rates and Exemptions

A. The 15% rate and its applicability

The general withholding rate under Section 1445 is 15% of the amount realized. This rate applies to dispositions on or after February 17, 2016, when the Protecting Americans from Tax Hikes (PATH) Act increased the rate from 10% to 15%. The rate does not fluctuate based on the seller's actual tax bracket or filing status. For illustration, two $2 million sales with adjusted bases of $1.8 million and $500,000 produce gains of $200,000 and $1.5 million before costs. Each generally produces $300,000 withholding unless an exception or certificate applies.

B. The $300,000 residence exception

No withholding is required if the amount realized does not exceed $300,000 and the transferee is an individual who acquires the property for use as a residence within the meaning of Section 1445, based on the use-day test for the first two 12-month periods after transfer: the buyer or a qualifying family member must have definite plans to reside there for at least 50% of the days the property is used by any person in each period; vacant days are disregarded. The test centers on the individual transferee and the required residential use. Where an entity, disregarded entity or trust is involved, identify the transferor and transferee under the applicable tax rules before relying on the exception.

C. Reduced rate for residences between $300,000 and $1,000,000

If a residence sells for more than $300,000 but not more than $1,000,000, and the transferee is an individual acquiring the property for use as a residence within the meaning of Section 1445, withholding is reduced to 10% instead of 15%.

D. Actively traded stock exception

For regularly traded domestic corporate stock, USRPI treatment generally applies only if the seller held more than 5% of the relevant class during the applicable lookback period; the threshold is more than 10% for regularly traded REIT shares. Apply constructive-ownership rules and the statutory testing period, generally the shorter of five years or the period held. Other REIT and entity-specific exceptions require separate analysis.

E. The seller’s principal-residence gain exclusion

Separately, a nonresident individual may qualify for §121’s principal-residence gain exclusion, subject to its ownership, use and other conditions. This is a seller-level gain rule, distinct from the buyer-residence withholding exception. Claiming §121 does not alone authorize reduced closing withholding; consider Form 8288-B. The IRS states that an NRA filing Form 1040-NR may exclude up to $250,000 if eligible. See the IRS FIRPTA guidance, Question 5.

III. US Real Property Holding Corporations (USRPHCs)

A. The 50% test

A domestic corporation is a USRPHC if the fair market value of its USRPIs equals or exceeds 50% of the sum of the fair market value of (a) its US real property interests, (b) its interests in real property located outside the United States, and (c) any other assets used or held for use in a trade or business. USRPHC status is determined under the statutory asset-value test, and for stock-disposition purposes the inquiry includes whether the corporation is a USRPHC or was one during the relevant lookback period, subject to applicable cleansing rules. A Mexican investor who holds 10% of a US corporation with ten operating office buildings and one industrial warehouse may have a USRPHC on their hands. If the stock is treated as a USRPI (for example, stock of a domestic USRPHC that does not qualify for an applicable exception), a sale by a foreign shareholder generally triggers FIRPTA withholding on the amount realized for the stock sale, not merely on the portion attributable to the underlying real property.

B. Consequences for shareholders

A foreign shareholder’s stock in a USRPHC generally is a USRPI, subject to the lookback rules and applicable shareholder-specific exceptions. When the shareholder sells the stock, the buyer must generally withhold 15% of the amount realized on the stock sale. The shareholder cannot avoid this by claiming the gain is on the sale of corporate securities rather than real property. Certain distributions by entities holding US real property interests can raise separate FIRPTA and withholding issues, but the analysis depends on the type of entity, the character of the distribution, and the specific withholding regime applicable to the transaction.

C. Cleansing transactions

Merely reducing the current USRPI ratio below 50% does not cleanse the stock’s historical USRPI status. Under §897(c)(1)(B), the corporation must hold no USRPIs at the stock disposition date; its prior USRPIs during the relevant lookback period must have been disposed of in transactions recognizing the full gain, or satisfy the statute’s qualifying cleansing alternative. Neither the corporation nor its predecessor may have been a RIC or REIT during the applicable period. Review current assets, historical dispositions and entity history separately before relying on this exclusion.

IV. The Withholding Certificate Process

A. Form 8288-B application

A foreign person may apply to the IRS on Form 8288-B for a withholding certificate to reduce or, in limited cases, eliminate withholding (for example, where the transfer is nonrecognition, the maximum tax due is less than the default withholding, or no tax will be due). The application must include detailed information about the property, the contract price, the estimated gain or loss, relevant deductions, and the basis calculation. The IRS rejects applications that are not substantially complete. An application must provide a specific or estimated transfer date and the supporting material required for its basis of relief. For a maximum-tax-liability application, this includes evidence of amount realized, adjusted basis and relevant tax calculations; additional valuation or debt documents depend on the transaction.

B. IRS processing timeline

The IRS states that it generally acts within 90 days after receiving a complete application, including all parties’ taxpayer identification numbers. This is not a guarantee of approval before closing. Allow time for missing information and processing delays, and coordinate the contract and escrow mechanics with the application.

C. Burden and contents of the certificate

If the IRS determines under the Section 1445 regulations that the transferor's maximum tax liability is less than the default withholding amount, or that no tax is due or another regulatory basis applies, it may issue a certificate reducing or eliminating withholding. The IRS examines whether the seller will owe less tax than 15% of the amount realized after accounting for basis, depreciation recapture, capital loss carryforwards, and related deductions. The certificate binds the buyer: if the buyer receives a valid certificate, the buyer withholds the amount specified, not 15%.

D. Refund claims

If excess withholding is remitted, the seller may claim a refund by filing the appropriate US income tax return and relying on the stamped Form 8288-A provided through the IRS after the buyer files the withholding forms. The refund claim must be filed by the expiration of the statute of limitations (generally the later of three years after filing the return or two years after paying the tax, subject to §6511’s separate refund lookback limits and applicable exceptions). An individual ineligible for an SSN may apply for an ITIN before filing a return if an applicable Form W-7 exception, including FIRPTA Exception 4, is satisfied. Entities generally use an EIN.

IV-A. State Nonresident Real Estate Withholding

Separate from federal FIRPTA, some states impose their own real estate or nonresident withholding rules on certain transfers, but these are state-specific regimes and are not FIRPTA. Their applicability varies significantly by jurisdiction and requires state-by-state analysis. Any applicable state withholding is in addition to federal withholding and affects the seller's net proceeds calculation and the buyer's compliance obligations.

V. FIRPTA Payment Methods

Federal payment methods are transitioning under Executive Order 14247. Confirm the current Form 8288 payment instructions and applicable IRS guidance before closing. A general electronic-payments initiative should not be treated as establishing a FIRPTA-specific EFTPS mandate or postponement for a particular transaction.

VI. Reporting and Buyer Liability

A. Form 8288 and Form 8288-A

The buyer generally must file and remit within 20 days after transfer. A qualifying withholding-certificate application submitted on or before transfer can defer filing and payment until the 20th day after the IRS mails the certificate or denial. A pending application does not itself remove the obligation to withhold at closing. The Form 8288 instructions govern the conditions. The buyer must file Form 8288-A with the IRS together with Form 8288; the IRS then furnishes the stamped Form 8288-A to the foreign seller as evidence of the withholding. The IRS-stamped Form 8288-A ordinarily substantiates the withholding credit. If it has not been received, the regulations permit substantial evidence of withholding together with the required statement. Failure to file timely exposes the buyer to penalties and may delay or complicate the seller's ability to claim a refund of excess withholding. If the buyer files Form 8288-A late or inaccurately, the seller's refund claim may be delayed or rejected. The buyer must also report the transaction to the state real estate withholding authority in certain states.

B. Buyer's liability for failure to withhold

If the buyer fails to withhold and remit the required amount, the buyer becomes liable to the IRS for the unpaid withholding plus penalties and interest. This liability is separate from the seller's US income tax liability. A buyer who fails to withhold can be held liable to the IRS for the withholding tax, penalties, and interest, although the buyer may seek contractual indemnity or reimbursement from the seller if the transaction documents so provide. This creates an incentive for buyers to demand certification that the seller is not a foreign person; absent such certification, the buyer may consult a tax advisor before closing to assess exposure.

C. Affidavit of non-foreign status

A buyer may avoid withholding if the seller provides an affidavit under penalty of perjury stating that the seller is not a foreign person and providing the required U.S. taxpayer identification number and address. The buyer cannot rely on a certificate known to be false or where the applicable notice rules preclude reliance. This affidavit is unavailable if the seller is a foreign person for US tax purposes. A Mexican national may still qualify as a non-foreign person if the individual is a US citizen or is treated as a US resident for tax purposes (for example, under the substantial presence test); nationality alone does not determine FIRPTA status.

If an LLC holding title is disregarded for U.S. federal tax purposes, its owner is the transferor for FIRPTA. Confirm that owner’s tax status and required certification and taxpayer information. U.S. formation of the LLC alone does not establish a nonforeign seller. See the IRS definition of transferor.

VI-A. Partnership Interest and Entity-Level FIRPTA

Transfers of partnership interests by foreign persons may trigger a separate withholding regime under IRC §1446(f), which applies because a portion of the gain may be treated as effectively connected under IRC §864(c)(8). This is distinct from Section 1445 FIRPTA withholding, and the applicable exceptions and certifications follow the Section 1446(f) regulations, not a simple asset-percentage test. This regime applies to transfers of partnership interests by foreign persons and is distinct from other withholding rules that may apply to partnership distributions or effectively connected income.

VII. US-Mexico Treaty Overlay

US-Mexico overlay. Article 13 of the US-Mexico Income Tax Convention provides that gains from the disposition of real property may be taxed in the country where the property is located (the source country). Article 13 is symmetric: both countries have primary taxing rights on gains from real property located in their territory. The US may impose its full Section 897 tax on a Mexican resident's gain from US real property, and Mexico may independently impose its full tax on the same gain. The treaty does not exempt the Mexican seller from US FIRPTA tax. The treaty preserves source-country taxing rights over gains from real property and addresses relief from double taxation, while the availability and mechanics of any Mexican foreign tax credit depend on the treaty read together with applicable Mexican domestic law.

The interaction between U.S. withholding and Mexican foreign-tax-credit mechanics can be complex, and the amount withheld at closing may not track the seller's final U.S. tax or the amount ultimately creditable in Mexico. The cross-border tax cost should therefore be modeled from the seller's actual basis, gain, and filing posture rather than from the withholding amount alone.

Mexican tax counsel will need to assess the total tax cost in both jurisdictions and to identify any planning opportunities available under Mexican law or the treaty. A withholding certificate may improve closing liquidity by reducing excessive prepayment without itself changing final U.S. tax liability. Separately assess final U.S. and Mexican taxes and the timing and limits of Mexican foreign-tax credits.

VII-A. Buyer Status and Dual-Jurisdiction Compliance

The federal FIRPTA withholding obligation generally turns on the seller's status as a foreign person and whether the asset transferred is a USRPI; the buyer's own status does not ordinarily change the basic Section 1445 withholding framework, although other cross-border compliance issues may arise depending on the parties and structure. Where the parties are Mexican tax residents or other Mexican reporting rules apply, analyze Mexican compliance separately alongside US FIRPTA.

VIII. Planning Considerations

A. Timing of withholding vs. filing

The withholding occurs at closing. The seller's actual US tax liability is determined on the seller's applicable US federal income tax return for the year of disposition (for example, Form 1040-NR for a nonresident alien individual or the appropriate return for a foreign entity). A refund claim is separate, and processing timing should not be assumed. For a Mexican seller, the interim period creates cash flow and potential cross-border tax uncertainty. If a complete Form 8288-B application is timely submitted, the parties may qualify to suspend remittance of withholding pending IRS action under the Section 1445 regulations, and an issued withholding certificate can reduce or eliminate the amount otherwise required to be withheld.

B. Blocker corporation structures

Some Mexican investors use a US holding company or blocker corporation to acquire and hold US real property. If the blocker is a US corporation, the corporation itself is subject to ordinary US corporate income tax rules on a later sale of the property; FIRPTA issues may arise instead when a foreign shareholder disposes of stock that is a USRPI or receives certain relevant distributions. The Mexican shareholder then exits the blocker in a separate transaction that may or may not be a USRPI sale depending on the blocker's classification and the treaty provisions. This structure adds complexity and generally shifts the manner and level at which US tax is imposed, rather than eliminating US tax exposure; the corporate-level tax and any later shareholder-level FIRPTA consequences must be analyzed separately.

C. Partnership and trust interests

A Mexican investor may hold an interest in a US partnership that owns real property. A transfer of a partnership interest by a foreign person may implicate the separate withholding regime under IRC §1446(f), rather than the 15% Section 1445 withholding rule that applies to direct transfers of USRPIs. The reporting and withholding mechanics depend on the Section 1446(f) regulations and related partnership certifications. The investor cannot avoid withholding by simply characterizing the interest as intangible or a securities interest.

IX. Compliance Checkpoints

A Mexican seller of US real property will coordinate with US and Mexican tax counsel on the following:

1. Confirmation that the buyer or the buyer's counsel has complied with Form 8288 and Form 8288-A filing deadlines.
2. Receipt of the stamped Form 8288-A furnished by the IRS and verification that the withholding amount is accurate.
3. Determination of whether to file a Form 8288-B application before closing to reduce withholding.
4. Preparation of the applicable U.S. income-tax return, such as Form 1040-NR for a nonresident alien individual, considering allowable deductions and depreciation recapture.
5. Determination of required Mexican returns and the eligibility, limits and supporting evidence for any Mexican credit for qualifying U.S. income tax.
6. Confirmation that any applicable state nonresident real estate withholding obligations have been satisfied.
7. For installment sales or other deferred-payment transactions, analysis of the special Section 1445 rules for determining and satisfying withholding on the amount realized, rather than assuming withholding occurs simply with each later payment.

Common Questions

Does FIRPTA withholding equal the seller's final U.S. tax liability?

No. FIRPTA withholding is a closing-time withholding mechanism, not the final tax calculation. The seller's final U.S. tax liability is determined on the applicable U.S. tax return, and the amount withheld may be higher or lower than the final tax due. Readers evaluating a live disposition should consult a qualified tax advisor or counsel licensed in the relevant jurisdiction.

Can a Mexican seller reduce FIRPTA withholding before closing?

In some cases, yes. A seller may apply for a withholding certificate on Form 8288-B where the regulatory requirements are satisfied, including where the maximum U.S. tax is less than the default withholding amount. Timing should be planned conservatively because IRS processing is not fixed. Readers evaluating a live disposition should consult a qualified tax advisor or counsel licensed in the relevant jurisdiction.

Does the U.S.-Mexico treaty eliminate FIRPTA?

Generally, no. Article 13 of the U.S.-Mexico treaty preserves source-country taxing rights over gains from real property, so the treaty generally does not exempt a Mexican seller from U.S. FIRPTA tax. Treaty and foreign-tax-credit analysis may still matter for double-taxation relief. Readers evaluating a live disposition should consult a qualified tax advisor or counsel licensed in the relevant jurisdiction.

Can Mexico also tax the gain from U.S. real property?

Yes, potentially. Mexico generally taxes its tax residents on worldwide income, so a Mexican-resident seller's gain on U.S. real property can fall within the Mexican tax base even though the United States, as the location of the property, also has the right to tax that gain. The two systems are coordinated rather than simply cumulative: Mexico generally allows a credit for the U.S. income tax paid on the same gain, subject to limits, which can reduce or offset the Mexican tax otherwise due. Whether and to what extent Mexico taxes a particular gain turns on the seller's residency and the specific facts, and the interaction of the U.S. and Mexican rules typically requires analysis on both sides. This is general information, not advice; facts drive outcomes, so readers evaluating a live disposition should consult a qualified tax advisor or counsel licensed in the relevant jurisdiction.

Related Insights

If FIRPTA is part of your transaction planning, you may also want to review our insights on asset versus stock deal structure and seller financing in cross-border M&A. Readers evaluating a live disposition should consult a lawyer licensed in the relevant jurisdiction.

This Insight is provided by Hiro Law for general informational and educational purposes only. It does not constitute legal, tax, investment, or other professional advice and should not be relied upon as such. No attorney-client relationship is created by your receipt of or access to this material. The information contained herein may not reflect the most current legal developments and is not guaranteed to be complete, correct, or up to date. You should not act or refrain from acting based on any information in this Insight without first seeking qualified counsel licensed in the relevant jurisdiction(s). Each cross-border transaction, investment, and compliance matter involves unique facts and circumstances that require individualized analysis. Prior results do not guarantee a similar outcome.