A Foreign Shareholder’s Stock Sale Can Still Fall Under FIRPTA

A share transfer can involve a U.S. real property interest

FIRPTA can apply to a foreign person's disposition of a U.S. real property interest, including qualifying stock in a domestic U.S. real property holding corporation. The analysis is therefore not limited to direct transfers of land and buildings. A buyer acquiring corporate shares from a foreign seller should review the target's property history and applicable exceptions before releasing the entire stock price without a withholding determination.

Identify the seller's tax status and obtain the target information needed for the corporate-status review. Property values and historical periods matter; a company selling its building before the stock closing does not automatically establish that the shares are outside FIRPTA. Have the tax team consider the statutory lookback and any applicable cleansing or other rule. Preserve a supported corporate statement or other required documentation rather than relying on the purchase agreement's assertion that this is only a stock sale.

Compare withholding with the seller’s actual gain

Assume a hypothetical foreign shareholder sells qualifying covered shares for $2 million and has $1.6 million adjusted basis. The simplified economic gain is $400,000 before expenses and other adjustments. At an assumed applicable fifteen-percent FIRPTA withholding rate on amount realized, $300,000 is withheld from the $2 million consideration. The rate and any exception must be confirmed for the actual transaction; this example is not a final withholding instruction.

The seller would receive $1.7 million before fees even if the eventual tax on the $400,000 gain is much lower than $300,000. Withholding is a collection mechanism, not necessarily final tax. Model the closing reduction, expected final liability, and potential refund timing separately. If a withholding certificate or other permitted procedure could change the amount, establish its requirements early. A seller who needs the full purchase price to repay personal debt should know that a stock transfer can produce a substantial cash retention despite a relatively modest gain.

Build the corporation’s asset-value history

Request financial statements, property appraisals, asset registers, subsidiary holdings, and prior property dispositions. The U.S. real property holding corporation test uses relevant asset values and categories rather than simply comparing the building's tax basis with book equity. Have a qualified reviewer document the method and dates. A service company with a valuable owned headquarters may need a different analysis from an otherwise identical company leasing its premises.

Review indirect interests and ownership changes rather than stopping at the parent balance sheet. Preserve the values and assumptions used for U.S. real property, other real property, and trade-or-business assets under the applicable test. If the target has sold property during the lookback period, obtain the sale and tax records relevant to the exception analysis. The buyer should know exactly what period the corporation's certificate covers and whether the provided facts support reliance on it under the applicable requirements.

Assign closing documentation and payment duties

The buyer is generally the withholding agent for a covered disposition and needs a specific process for certificates, withholding, remittance, and reporting. Use current Forms 8288 and 8288-A instructions and the applicable deadlines. Name the person preparing the forms and the person authorizing payment. Gather tax identification numbers and seller mailing information before the wire schedule is finalized, not after the foreign owner becomes difficult to reach.

Coordinate FIRPTA with any other relevant withholding regimes rather than assuming one replaces another automatically. The target's continued corporate existence does not eliminate the buyer's transfer-related duty. The purchase agreement should allocate cooperation, documentation, and reimbursement obligations while recognizing that contractual allocation alone does not satisfy federal reporting. Preserve any reduced-withholding application and agency response. A pending request should be handled under its actual procedural rules, not treated as an approved reduction because both parties expect it eventually to succeed.

Reconcile the seller’s return and credit evidence

Give the seller's return preparer the final share sale calculation, withholding forms, payment evidence, and corporate-status analysis. Track the withholding credit and any refund claim using the correct taxpayer identity. Preserve the asset history and certificates in the buyer's acquisition file as well. The final proceeds bridge should explain why shares were covered, what exception or rate was used, and how closing withholding connects to final tax. That record prevents the parties from discovering only after closing that keeping the building inside the corporation did not remove the foreign seller's transaction from FIRPTA.