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FIRPTA - Foreign Sellers, The Substantial Presence Test, & Why Some Title Companies Withhold Tax When They Don't Need To
A Florida real estate closing can go sideways fast when a seller is treated as “foreign” for tax withholding purposes, even though the seller may actually be a U.S. resident for federal tax purposes.
That is the problem many sellers, Realtors, mortgage brokers, and buyers run into with FIRPTA withholding. Some title companies see that a seller is not a U.S. citizen or green card holder and immediately default to withholding. But federal tax residency is not limited to citizenship or permanent resident status.
A noncitizen may qualify as a U.S. resident for federal tax purposes under the IRS substantial presence test. When that happens, the seller may not be treated as a foreign seller for FIRPTA purposes.
The issue is simple in concept, but it can be expensive in practice. If the title company will not recognize the test, it may withhold 15% of the sales price and send that money to the IRS, even when the seller believes the withholding should not apply.
This article is for general educational purposes only. FIRPTA and tax residency questions should be reviewed with a qualified tax professional.
Citizenship and federal tax residency are different issues
One of the biggest misunderstandings in FIRPTA Florida closings is the belief that a seller must be a U.S. citizen or green card holder to be treated as a U.S. resident for tax purposes.
That is not correct.
For federal tax purposes, a person may be treated as a U.S. resident in more than one way. A green card holder is generally treated as a resident alien. But a noncitizen who does not have a green card may also be treated as a U.S. resident if they meet the IRS substantial presence test.
That distinction matters because FIRPTA withholding focuses on whether the seller is a foreign person for federal tax purposes. It does not simply ask whether the seller has a U.S. passport or green card.
In plain English:
Citizenship asks what country legally claims you as a citizen.
Federal tax residency asks how the IRS treats you for U.S. tax purposes.
Those are not the same question.
A seller could be a citizen of another country, have no green card, and still qualify as a U.S. resident for federal tax purposes under the substantial presence test. If so, the seller may be able to sign a non-foreign certification at closing, assuming the facts support it and proper tax guidance has been obtained.
This is where some closings become difficult. A title company may be comfortable with a U.S. citizen. It may be comfortable with a green card holder. But when the seller is relying on the substantial presence test, some companies hesitate or refuse to accept that position.
That hesitation can trigger unnecessary FIRPTA withholding.
How the substantial presence test works
The substantial presence test is based on physical presence in the United States. It looks at how many days the individual was actually present in the U.S. during the current year and the two prior years.
The general test has two parts.
The seller must be physically present in the United States for:
At least 31 days during the current year
At least 183 weighted days over the current year and the two prior years
The weighted day count works like this:
Year counted | How much of the time counts |
Current year | 100% |
Prior year | 1/3 |
Second prior year | 1/6 |
Here is a simple example.
Assume a seller was present in the United States for:
Year | Actual days in the U.S. | Weighted days |
Current year | 120 days | 120 days |
Prior year | 180 days | 60 days |
Second prior year | 180 days | 30 days |
Total | 210 weighted days |
In that example, the seller meets the 31-day current year requirement and exceeds 183 weighted days. That person may be treated as a U.S. resident for federal tax purposes under the substantial presence test, subject to the details, exceptions, and tax advice that may apply.
There are exceptions and special rules. Certain days may not count in some situations. Some individuals may qualify for treaty positions or a closer connection exception. That is why a title company should not act as the seller’s tax advisor, and why sellers should speak with a qualified tax professional when FIRPTA withholding may be an issue.
Still, the main point is clear: a noncitizen can be a U.S. tax resident without being a U.S. citizen or green card holder.
Why some title companies still default to withholding
Title companies handle closings, collect documents, disburse funds, and follow underwriting requirements. They are not tax courts, and they usually do not want to make judgment calls on complicated tax residency issues.
That helps explain why a FIRPTA title company may default to withholding when a seller is not a citizen or green card holder. From the title company’s perspective, withholding may feel safer than accepting a tax position it does not feel equipped to evaluate.
Common reasons include:
The title company has a strict internal policy
The underwriter requires clear proof of citizenship or green card status
The closing team is unfamiliar with the substantial presence test
The seller does not have tax documentation ready
The facts are unclear or incomplete
The company does not want liability if the seller’s claim is wrong
Those concerns are understandable, but they do not erase the tax rule.
If the seller truly qualifies as a U.S. resident for federal tax purposes, treating the seller as foreign simply because the seller is not a citizen or green card holder can create a major cash flow problem.
This is especially common in foreign seller Florida real estate transactions because Florida attracts international property owners, seasonal residents, investors, workers, students, and families with complex immigration and travel histories. Many people spend enough time in the United States to trigger U.S. tax residency, even if their immigration status is not permanent residency.
The phrase “foreign seller” can also confuse the issue. A person may feel foreign for immigration purposes, but not be foreign for federal income tax purposes. FIRPTA withholding depends on federal tax status, not on the label people use in everyday conversation.
For anyone searching for Title Company Foreign Sellers Tax on Real Estate, this is the key issue to understand. The title company’s comfort level and the seller’s federal tax status are two separate things. A careful closing process should address both.
The real cost of a missed substantial presence issue
Consider this real world example.
A married couple sells their primary residence in Florida for $499,000. Both spouses meet the substantial presence test. They are not U.S. citizens. They are not green card holders. But based on their days in the United States, they may be treated as U.S. residents for federal tax purposes.
The title company refuses to recognize the substantial presence test and withholds 15%, or $74,850, from the sales proceeds.
That is a painful result.
The money is not necessarily gone forever. If the sellers are entitled to a credit or refund, they may be able to pursue it through the IRS. But that does not solve the immediate problem.
The sellers may need that money for:
The purchase of another home
Moving expenses
Paying off other obligations
Replacing savings used during the sale process
Handling family or business needs after closing
When $74,850 is tied up with the IRS, the seller loses access to that money while the refund or credit process plays out. That can take time, and the delay may create financial stress that could have been avoided with better planning.
This is why FIRPTA 15 percent withholding should never be treated as a routine box to check. It can materially change a seller’s closing proceeds.
In a Florida closing, 15% of the sales price is not a small number. On a $499,000 sale, the withholding is calculated on the gross sales price, not on the seller’s profit. That matters because a seller could owe a mortgage, pay commissions and closing costs, and still face withholding based on the full contract price.
That is often the shock. Sellers sometimes assume withholding is based on gain. In many FIRPTA withholding situations, the closing agent is looking at the sales price. The result can feel completely disconnected from the seller’s actual net proceeds.
Realtors should raise FIRPTA questions early
FIRPTA issues should not be discovered two days before closing.
Realtors are often the first professionals in the transaction who can spot a potential problem. That does not mean Realtors should give tax advice. They should not. But they can identify warning signs early and encourage the seller to speak with the right professionals.
Possible red flags include:
The seller is not a U.S. citizen
The seller does not have a green card
The seller lives outside the United States part of the year
The seller has an international mailing address
The seller recently moved to or from the United States
The seller is unsure whether FIRPTA applies
The seller says they spend significant time in the U.S. each year
When one of these facts appears, the question should be raised early with the title company and, when necessary, a qualified tax professional.
Early review gives everyone more options. The seller may have time to gather travel records, passports, tax filings, immigration documents, or professional guidance. The title company may have time to review its underwriting requirements. If there is disagreement, the parties can address it before the closing is at risk.
Waiting until the final settlement statement is prepared creates pressure. At that point, the title company may be less willing to consider anything outside its standard process. The buyer may be anxious to close. The seller may feel trapped.
The better approach is direct and early communication.
A Realtor does not need to know the final tax answer. The Realtor only needs to recognize that federal tax residency is different from citizenship and that the substantial presence test may matter.
What sellers should prepare when substantial presence may apply
A seller who plans to rely on the substantial presence test should not assume the title company will simply accept a verbal explanation.
The seller should be ready to support the position. The exact documents needed will depend on the facts, the tax professional’s advice, and the title company’s requirements.
Useful information may include:
A year-by-year travel history
Passport entry and exit records
Airline itineraries or travel records
Prior U.S. tax filings, if applicable
Immigration status information
A written analysis from a qualified tax professional
Any forms or certifications the title company requires
The goal is not to overwhelm the closing team. The goal is to make the issue clear enough that it can be handled before closing.
If the seller qualifies as a U.S. resident for federal tax purposes, the seller may be able to provide a non-foreign certification. But that certification is serious. It should only be signed if it is accurate. A seller should not sign tax certifications based on guesswork or pressure to close.
At the same time, a title company should not ignore a valid federal tax residency position simply because it is less familiar than citizenship or green card status.
This is where a knowledgeable title company can make a real difference. The closing team does not need to replace the tax professional. It does need to understand the issue, recognize when the substantial presence test may be relevant, and communicate clearly about what it can or cannot accept.
The practical takeaway for Florida closings
FIRPTA withholding exists for a reason, but it should be applied based on the correct tax status. A seller does not have to be a U.S. citizen or green card holder to be treated as a U.S. resident for federal tax purposes.
The substantial presence test can change the analysis.
If the seller meets the test, and no exception or other issue changes the result, the seller may not be a foreign person for FIRPTA withholding purposes. But some title companies still default to withholding when they see a noncitizen seller without a green card.
That default can be costly. In the $499,000 sale example, the difference was $74,850 tied up with the IRS.
Florida Realtors should raise potential FIRPTA issues early, especially when working with international sellers, seasonal residents, or anyone with a complex U.S. travel history. Sellers should involve a qualified tax professional when there is any doubt.
If a seller may have a FIRPTA issue, contact The Title Firm early in the transaction. Early review gives the closing team time to identify the problem, ask the right questions, and help keep the Florida closing on track.
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