FIRPTA Explained

U.S. Tax Withholding When Foreign Owners Sell Property

What is FIRPTA?

The Foreign Investment in Real Property Tax Act, known as FIRPTA, was enacted in 1980 to address a straightforward problem the U.S. government faced with foreign investors: when a foreign person sold U.S. real estate and left the country, the IRS had very limited ability to collect any capital gains tax owed.

Before FIRPTA, a foreign seller could dispose of a U.S. property, receive the proceeds, and return to their home country without the IRS having any practical mechanism to enforce collection. FIRPTA solved this by shifting responsibility for collection to the transaction itself.

Under FIRPTA, when a foreign person sells a U.S. real property interest, the buyer is required to withhold a percentage of the gross sale price and remit it directly to the IRS. The withheld amount is treated as a deposit against the foreign seller's ultimate U.S. tax liability. If the actual tax owed is less than the amount withheld, the seller can recover the excess by filing a U.S. tax return.

FIRPTA applies to U.S. real property interests, which include direct ownership of land and buildings, ownership interests in entities that are classified as U.S. Real Property Holding Corporations (USRPHCs), and certain leaseholds. For most foreign individuals selling residential or commercial property in the United States, the direct ownership rules are the relevant ones.

FIRPTA is not a separate tax. It is a withholding mechanism. The underlying tax on the gain is calculated on the foreign seller's U.S. income tax return, at the same rates that apply to U.S. residents for comparable transactions. FIRPTA simply ensures that the IRS receives a payment upfront, before the proceeds leave the country.

The 15% Withholding Rule

Since February 2016, the standard FIRPTA withholding rate has been 15% of the gross sale price. This rate applies regardless of what the actual gain is, and regardless of whether the seller will ultimately owe any tax at all. The calculation is based on the total amount realized, not the profit.

To put this in concrete terms: if a foreign person sells a U.S. property for $800,000, the buyer must withhold $120,000 and remit it to the IRS, even if the seller originally paid $750,000 for the property and the gain is only $50,000. The withholding is calculated on the sale price, not the profit.

This can create significant cash flow challenges for foreign sellers, particularly where the net gain is modest relative to the sale price. A seller with a low-margin transaction may find that a substantial portion of their expected proceeds are withheld pending a tax return.

Reduced Withholding for Certain Residential Sales

There is an important exception for residential property sold to a buyer who intends to use it as a principal residence. If the sale price is between $300,000 and $1,000,000 and the buyer signs a declaration confirming their intent to occupy the property as a primary residence, the withholding rate is reduced to 10% rather than 15%.

Where the sale price is $300,000 or less and the buyer intends to use the property as their principal residence, FIRPTA withholding is waived entirely. This exemption exists because many sales in this price range involve buyers purchasing a home for personal use rather than investors acquiring a commercial asset, and the IRS determined that the administrative cost of withholding in these transactions outweighed the benefit.

It is important to understand that these exceptions apply based on the buyer's intended use, not the seller's. A foreign seller cannot rely on these exemptions unilaterally. The buyer must make the appropriate declaration in writing, and the parties must satisfy themselves that the conditions are met before closing.

The Forms Involved in FIRPTA

FIRPTA compliance involves three specific IRS forms. Understanding what each one does is important for both buyers and sellers navigating a transaction.

Form 8288

Form 8288 is the U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests. This form is filed by the buyer, who acts as the withholding agent under FIRPTA. The buyer uses Form 8288 to report the transaction and remit the withheld amount to the IRS.

Form 8288 must be filed, and the withheld tax must be remitted, within 20 days of the closing date. This is a strict deadline. Late filing results in penalties and interest. In practice, this obligation typically falls on the settlement agent or title company handling the closing, acting on behalf of the buyer.

Form 8288-A

Form 8288-A is the Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. It accompanies Form 8288 and provides details about the foreign seller, the property, and the amount withheld. Two copies are submitted to the IRS along with Form 8288. The IRS processes the form and stamps one copy, which is then sent to the foreign seller.

The stamped copy of Form 8288-A is significant because it is the document the foreign seller uses to claim credit for the withheld tax on their U.S. tax return. Without the stamped copy, the seller cannot obtain the credit for the withholding already paid. If the stamped copy is not received, the seller must contact the IRS to obtain it before filing their return.

Form 8288-B

Form 8288-B is the Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. This is the mechanism by which a foreign seller can apply to the IRS for a reduction or elimination of FIRPTA withholding before or at the time of closing.

An application on Form 8288-B can be submitted where the withholding would exceed the seller's actual expected tax liability. The most common scenario is a sale where the capital gain is small relative to the sale price, or where the seller expects to report a loss. The IRS can issue a withholding certificate that reduces or eliminates the amount the buyer must withhold.

The practical challenge with Form 8288-B is timing. The IRS aims to process applications within 90 days, though processing times can extend beyond this. If the closing is imminent, applying for a withholding certificate may not be feasible. In those cases, the standard withholding applies at closing, and the seller recovers the excess through the annual tax return filing.

Where a Form 8288-B application has been submitted and is pending at the time of closing, the buyer is permitted to hold the withheld funds in escrow rather than remitting them immediately to the IRS. This preserves the seller's cash while the IRS processes the application. Once the certificate is issued or denied, the escrow is released accordingly.

Claiming Back Excess Withholding

In the majority of FIRPTA transactions, the amount withheld at closing exceeds the actual U.S. capital gains tax owed by the foreign seller. This is particularly common where the property has been held for many years, the purchase price was relatively high compared to the sale price, or where the seller has accumulated depreciation deductions that affect the cost basis calculation.

Recovering the excess requires filing a U.S. income tax return. For a foreign individual, this means Form 1040-NR. The return reports the gain on sale, calculates the capital gains tax owed, and claims a credit for the FIRPTA withholding already remitted to the IRS. If the credit exceeds the tax liability, the IRS issues a refund.

The gain on sale is calculated as the difference between the amount realized (generally the sale price less selling costs) and the adjusted basis of the property. The adjusted basis is the original purchase price plus capital improvements, less depreciation claimed or allowable over the holding period.

This is where the depreciation issue becomes important. U.S. tax rules require that depreciation be recaptured at a maximum rate of 25% on sale, regardless of whether it was actually claimed during ownership. A foreign landlord who failed to claim depreciation on prior returns cannot simply ignore it on sale. The IRS treats the property as if depreciation was taken, and the recapture tax applies accordingly.

Long-term capital gains, on property held for more than one year, are taxed at preferential rates for most taxpayers. The rates are 0%, 15%, or 20% depending on total taxable income. For many foreign sellers with no other U.S. income in the year of sale, the applicable rate may be lower than the 15% FIRPTA withholding rate, making a refund likely.

The Form 1040-NR for the year of sale is typically due on June 15 of the following year, with a possible extension to October 15. Refund claims generally take several months to process. Complex returns, or those accompanied by incomplete or incorrect Forms 8288-A, may take longer.

Common Issues at Closing

FIRPTA creates a number of practical problems that can disrupt or delay real estate transactions involving foreign sellers. The following are the situations most commonly encountered in practice.

Failure to identify the seller as a foreign person

FIRPTA obligations are triggered by the foreign status of the seller. If a seller misrepresents themselves as a U.S. person, or if the settlement agent fails to ask the right questions, the withholding may not be applied. The buyer then becomes personally liable for the tax that should have been withheld. Buyers and their agents should obtain a written declaration of U.S. or non-U.S. status from every seller as a standard part of due diligence.

Missed filing deadline for Form 8288

The 20-day filing deadline for Form 8288 is not always understood by settlement agents unfamiliar with FIRPTA. Missing this deadline results in penalties. Where the settlement agent is handling the transaction, the buyer should confirm in advance that FIRPTA compliance is part of the service being provided.

Incorrect withholding amount

If the withholding amount is calculated incorrectly, either too high or too low, it creates problems. Underwithholding exposes the buyer to liability. Overwithholding does not create a legal problem but delays the seller's access to funds until the return is processed and the refund issued.

Form 8288-A not received by the seller

If the IRS does not return the stamped Form 8288-A to the foreign seller after processing, the seller cannot claim the withholding credit on their return. This happens more often than it should, particularly where the seller's address was not correctly recorded on the original submission. Sellers who have not received the stamped form within a reasonable period after closing should contact the IRS or their tax adviser.

Withholding certificate applications submitted too late

Some sellers apply for a withholding certificate on Form 8288-B after the closing date has already passed. At that point, the withholding obligation has already arisen and the application is ineffective. Applications must be submitted before or concurrent with the closing to have any effect on the amount withheld.

Misunderstanding the LLC structure

Foreign investors sometimes hold U.S. real property through an LLC, believing this will change or reduce the FIRPTA withholding obligation. In most cases, a single-member LLC owned by a foreign person is treated as a disregarded entity, meaning the foreign person is treated as selling the property directly. FIRPTA applies in the same way as if the property were held in the owner's name.

How Antravia Advisory Supports Foreign Property Sellers

Selling U.S. property as a foreign owner involves more than finding a buyer and completing the conveyancing. The FIRPTA withholding obligations, the required IRS forms, and the subsequent U.S. tax return all require careful management to avoid unnecessary costs and delays.

At Antravia Advisory, we assist foreign sellers at every stage of this process. Before a sale completes, we assess the likely withholding position and advise on whether a Form 8288-B application is worth pursuing given the timeline. Where a certificate application is viable, we prepare the submission and manage communication with the IRS.

After closing, we prepare the Form 1040-NR for the year of sale, calculate the correct gain including depreciation recapture, and claim credit for the FIRPTA withholding. Where a refund is due, we ensure the return is filed correctly and promptly to minimize the period during which proceeds remain with the IRS.

We also advise on the UK tax treatment of the disposal, including the calculation of the gain for UK capital gains tax purposes and the application of foreign tax credits to avoid double taxation on the same proceeds.

If you are in the process of selling U.S. property or are planning a future disposal, contact Antravia Advisory to discuss how we can support the transaction from a tax compliance perspective.

Disclaimer:
Content published by Antravia is provided for informational purposes only and reflects research, industry analysis, and our professional perspective. It does not constitute legal, tax, or accounting advice. Regulations vary by jurisdiction, and individual circumstances differ. Readers should seek advice from a qualified professional before making decisions that could affect their business.

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