The Foreign Investment in Real Property Tax Act (FIRPTA), enacted in 1980 and significantly amended in subsequent decades, fundamentally changed the U.S. tax treatment of foreign persons who sell U.S. real property interests. For Turkish nationals and Turkish-owned entities investing in U.S. real estate, FIRPTA compliance is not optional — it is a mandatory legal obligation with significant financial consequences for non-compliance.

This guide explains how FIRPTA works, what it costs, how to reduce or eliminate withholding through available mechanisms, and how FIRPTA interacts with other tax planning strategies commonly used by Turkish investors.

Prior to FIRPTA, foreign persons who sold U.S. real property could often avoid U.S. taxation on the gain by simply not filing a U.S. tax return. FIRPTA closed this gap by imposing a withholding obligation on the buyer — not the seller. When a foreign person sells a U.S. real property interest, the buyer is required to withhold a percentage of the gross sales price and remit it to the IRS, regardless of whether the seller actually owes tax.

This withholding mechanism ensures that the IRS can collect tax from foreign sellers who might otherwise have no U.S. tax presence. The withheld amount is credited against the seller's actual U.S. tax liability when they file their return.

FIRPTA applies to:

• Nonresident alien individuals: Turkish nationals who are not U.S. citizens, lawful permanent residents, or individuals who meet the substantial presence test
• Foreign corporations: Companies incorporated outside the United States, including Turkish joint-stock companies (A.Ş.) and limited liability companies (Ltd. Şti.)
• Foreign partnerships, trusts, and estates: Entities organized under foreign law
• Domestic entities with foreign ownership: A U.S. LLC or corporation that is itself a "U.S. real property holding corporation" (USRPHC) — meaning more than 50% of its assets consist of U.S. real property interests — may trigger FIRPTA on the sale of its interests

For Turkish investors who hold U.S. real estate through a U.S. LLC (a common structure), the sale of the LLC membership interests — not just the underlying property — can trigger FIRPTA withholding if the LLC qualifies as a USRPHC.

The withholding rate depends on the sales price and the buyer's intended use:

Important: The withholding is calculated on the gross sales price, not the gain. A Turkish investor who sells a $2,000,000 property with a $200,000 gain will have $300,000 withheld (15% of $2,000,000) — even though the actual tax on the $200,000 gain may be far less.

The buyer (or the buyer's closing attorney or title company) is responsible for:

1. Withholding the required amount at closing
2. Filing Form 8288 (U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons) with the IRS within 20 days of the closing date
3. Remitting the withheld amount to the IRS with the Form 8288 filing

The seller receives a copy of Form 8288-A (Statement of Withholding on Certain Dispositions by Foreign Persons), which they use to claim credit for the withheld amount on their U.S. tax return.

Buyer liability: If the buyer fails to withhold and remit, the buyer becomes personally liable for the tax that should have been withheld, plus interest and penalties. This creates strong incentives for buyers and their closing agents to comply strictly with FIRPTA requirements.

The most powerful tool available to Turkish sellers is the FIRPTA Withholding Certificate (obtained via Form 8288-B). A withholding certificate allows the seller to reduce or eliminate withholding before closing — rather than waiting to recover excess withholding through a tax return filing.

A withholding certificate application should be filed with the IRS as early as possible — ideally 90 days before the anticipated closing date. The IRS has 90 days to act on a complete application, though in practice, processing times vary.

The IRS will issue a withholding certificate reducing withholding when:

Maximum tax liability is less than the standard withholding amount: If the seller's actual U.S. tax liability on the gain is demonstrably less than the 15% withholding, the IRS will reduce withholding to the estimated tax amount. This is the most common basis for a withholding certificate application.

Example: A Turkish investor sells a New York condominium for $1,500,000. The adjusted basis is $1,200,000, producing a $300,000 gain. Standard withholding would be $225,000 (15% of $1,500,000). The actual federal tax on a $300,000 long-term capital gain for a nonresident alien is approximately $60,000–$75,000. A withholding certificate would reduce withholding to the estimated tax amount, freeing up $150,000–$165,000 at closing.

Installment sale: If the sale proceeds are to be paid in installments over time, withholding can be spread across the installment payments rather than collected entirely at closing.

No gain realized: If the seller can demonstrate that no gain will be realized (e.g., the property is being sold at a loss), the IRS may issue a certificate eliminating withholding entirely.

Form 8288-B requires:

• Identification of the seller and buyer
• Description of the property
• Calculation of the anticipated gain and estimated tax liability
• Supporting documentation (purchase price, adjusted basis, depreciation schedules, closing cost estimates)

The application must be filed before or on the date of closing. If filed before closing, the parties can agree to hold the withheld amount in escrow pending IRS action, rather than remitting it immediately.

Certain transactions are exempt from FIRPTA withholding entirely:

Residence exemption: If the buyer acquires the property for use as a personal residence and the sales price does not exceed $300,000, no withholding is required. For sales prices between $300,001 and $1,000,000, the reduced 10% rate applies (rather than 15%).

Publicly traded stock: Interests in publicly traded corporations are generally exempt from FIRPTA, even if the corporation holds U.S. real property.

Qualified investment entity distributions: Certain distributions from REITs and regulated investment companies have specific FIRPTA rules.

Non-foreign affidavit: If the seller provides a sworn statement (under penalties of perjury) that they are not a foreign person, the buyer is not required to withhold. However, a Turkish national cannot truthfully provide this affidavit unless they have become a U.S. citizen or lawful permanent resident.

A 1031 like-kind exchange allows a seller to defer capital gains tax by reinvesting the proceeds from a property sale into a replacement property of equal or greater value. Turkish investors frequently use 1031 exchanges to defer U.S. tax on appreciated real estate.

FIRPTA interaction: A 1031 exchange does not eliminate FIRPTA withholding — it defers the underlying tax liability. The buyer of the relinquished property must still withhold under FIRPTA unless a withholding certificate is obtained. However, the seller can apply for a withholding certificate on the basis that the exchange will defer the tax liability, potentially reducing withholding to zero.

Qualified intermediary: A 1031 exchange requires a qualified intermediary (QI) to hold the exchange proceeds between the sale of the relinquished property and the purchase of the replacement property. The QI must be aware of the FIRPTA withholding requirements and coordinate with the parties accordingly.

The choice of holding structure significantly affects FIRPTA exposure:

Individual ownership: Direct ownership by a Turkish national triggers FIRPTA on sale. Simple but maximum exposure.

U.S. LLC (single-member, disregarded entity): The LLC is disregarded for U.S. tax purposes — the Turkish national is treated as directly owning the property. FIRPTA applies on sale of the property or the LLC interests.

U.S. LLC (multi-member): Treated as a partnership for U.S. tax purposes. FIRPTA applies to the foreign partner's allocable share of gain on sale of the property, and to the sale of the foreign partner's LLC interest if the LLC is a USRPHC.

U.S. C-Corporation: A U.S. corporation is not a "foreign person" — FIRPTA does not apply to the corporation's sale of property. However, the Turkish shareholder's sale of the corporation's stock may trigger FIRPTA if the corporation is a USRPHC. Additionally, the corporation pays corporate income tax on the gain, and the shareholder pays tax on dividends or capital gains on the stock — potentially resulting in double taxation.

Foreign corporation: A Turkish A.Ş. or Ltd. Şti. holding U.S. real property is a foreign person subject to FIRPTA. Additionally, the foreign corporation may be subject to the branch profits tax (an additional 30% tax on effectively connected earnings repatriated to the foreign parent, subject to treaty reduction).

The United States and Turkey have a bilateral income tax treaty that affects the taxation of Turkish investors' U.S. real estate income and gains. Key provisions:

• Capital gains: The treaty generally allows the U.S. to tax gains from the sale of U.S. real property by Turkish residents, consistent with FIRPTA
• Rental income: Turkish investors earning rental income from U.S. property may elect to treat it as effectively connected income (ECI), allowing deductions for expenses, depreciation, and mortgage interest
• Branch profits tax: The treaty reduces the branch profits tax rate for Turkish corporations from 30% to 5%
• Withholding on dividends: Reduced withholding rates on dividends paid by U.S. corporations to Turkish shareholders

Beyond FIRPTA, Turkish investors in U.S. real estate have ongoing annual compliance obligations:

Form 1040-NR (Nonresident Alien Income Tax Return): Filed annually to report U.S.-source income, including rental income and capital gains. Due April 15 (or June 15 for nonresident aliens with no U.S. withholding agent).

Form 8840 (Closer Connection Exception): Turkish nationals who spend significant time in the U.S. may inadvertently meet the substantial presence test and become U.S. tax residents. Form 8840 can be used to claim a closer connection to Turkey and avoid U.S. resident tax status.

FBAR and FATCA: Turkish investors with U.S. bank accounts or financial accounts exceeding certain thresholds may have reporting obligations under the Bank Secrecy Act (FBAR) and FATCA.

State tax returns: Most U.S. states with income taxes require nonresident investors to file state returns for income sourced within the state.

ULF New York works with Turkish real estate investors and their U.S. tax advisors to structure investments, manage FIRPTA withholding obligations, and ensure full compliance with U.S. federal and state tax requirements.