What Illinois Real Estate Buyers Must Know About FIRPTA

 Posted on October 06, 2025 in Residential Real Estate

If you have ever bought or sold property, you know how challenging it can be. But what about when unexpected tax laws are part of the deal? A federal law known as the Foreign Investment in Real Property Tax Act (FIRPTA) requires buyers to withhold a portion of the sale price when purchasing from a foreign seller.

Should you fail to comply with this Act, you could be on the hook for tens of thousands of dollars in unpaid taxes. Whether you are a buyer, seller, or real estate professional, you must understand FIRPTA’s role to avoid costly mistakes. It can be extremely beneficial to have a knowledgeable Lisle, IL real estate attorney to help you navigate the complexities of FIRPTA.

What Is FIRPTA?

FIRPTA is a federal law that was enacted in 1980 to ensure that foreign sellers paid U.S. taxes on all property sales. FIRPTA applies in every state. The basic rule under the Act is that buyers are required to withhold 10-15 percent of the sales price at closing if the seller is a "foreign person." This means the seller is a nonresident alien individual, foreign corporation, partnership, or trust.

The FIRPTA withholding applies to both residential and commercial property sales. Buyers, rather than title companies, are responsible for ensuring the withholding occurs. There are two exceptions to FIRPTA. The first is when the buyer intends to use the property as a residence and the purchase price is $300,000 or less, and the second is when the seller provides a withholding certificate from the IRS.

What is the Buyer’s FIRPTA Responsibility?

The buyer in a FIRPTA transaction is considered the "withholding agent," thus is responsible for ensuring the proper amount is withheld at closing and sent to the IRS. If the buyer fails to withhold the correct amount, the IRS can hold the buyer liable for the tax, along with penalties and interest.

The withholding amount is usually 15 percent of the gross purchase price. However, if the purchase price is between $300,001 and $1 million, and the property will be used as a residence, a lower rate of 10 percent may apply.

The confusion lies in the fact that while the seller actually owes the tax, the buyer is responsible for the withholding process and becomes liable if it is not withheld. The amount that is withheld by the buyer is treated as a prepayment toward the foreign seller’s U.S. tax liability.

What Are the Consequences of Ignoring FIRPTA Requirements?

A buyer should never ignore the FIRPTA requirements, as he or she could become liable for the seller’s unpaid tax. Penalties and interests with the IRS can add up quickly, plus there may be disputes or delays at closing if FIRPTA is not handled correctly.

Many people expect that the title company will handle the entire issue, but this is not the case. While it is the seller’s liability, the buyer is responsible for withholding the money and paying it to the IRS. Buyers should always conduct their due diligence early on in the process to determine whether FIRPTA applies.

Contact a Wheaton, IL Real Estate Lawyer

If you are buying or selling property in the state of Illinois and FIRPTA may apply, you should never ignore it or assume someone else will take care of it. This is a costly mistake that could result in thousands of dollars in taxes and penalties. When you choose a Lisle, IL residential real estate attorney from The McCormick Law Firm, LLC, you can rest easy, knowing all the details will be handled properly.

Attorney McCormick can help you navigate FIRPTA compliance, ensure proper withholding, and protect your transaction. He is licensed to practice real estate law in Wisconsin and can work with Illinois residents who are looking to purchase property or address other legal concerns. You will always work directly with Attorney McCormick, who offers discounts to military personnel, veterans, and first responders. To schedule your free consultation, call 630-517-8570.