How Does FIRPTA Withholding Work for Foreign Sellers?

If the seller of U.S. real property is a foreign person, the buyer must withhold 15 percent of the gross sales price and send it to the IRS within 20 days after closing. That is FIRPTA withholding, under the Foreign Investment in Real Property Tax Act, and it applies to the amount realized, not the seller’s profit. A foreign seller with little or no gain can still see a large share of the proceeds held back at the closing table, and a buyer who fails to withhold becomes liable for the tax. Both sides need to plan for it before the contract is signed.

Who counts as a foreign person

FIRPTA treats nonresident alien individuals, foreign corporations, foreign partnerships, foreign trusts, and foreign estates as foreign persons. A green card holder is a resident alien for this purpose and is not subject to withholding. So is a visa holder who meets the substantial presence test for the year of sale. The seller proves non-foreign status by signing a certification of non-foreign status with a U.S. taxpayer identification number, which the buyer keeps on file. If the property is held through a single-member LLC that is disregarded for tax purposes, the IRS looks through to the owner, so an LLC owned by a nonresident does not avoid the rule.

Our real estate team raises FIRPTA at the contract stage for any seller who lives abroad, because the withholding changes the cash the seller walks away with and can even leave a seller short if a mortgage payoff is larger than the net proceeds after withholding. The same planning applies on the way in; our guide to buying a home without U.S. citizenship covers the purchase side.

How the withholding mechanics work

The buyer is the withholding agent, though in practice the settlement agent handles the paperwork. At closing, the withheld amount is sent to the IRS with Form 8288 and a Form 8288-A for each foreign seller. The IRS stamps a copy of the 8288-A and returns it to the seller, who needs it to claim credit for the withholding. A seller without a Social Security number must obtain an Individual Taxpayer Identification Number by filing Form W-7, and the application can be submitted along with the withholding forms if the seller does not already have one. Start that early; a missing ITIN is the most common reason a refund stalls.

The withholding is a prepayment, not the final tax. After the year ends, the seller files a U.S. tax return (Form 1040-NR for an individual) reporting the actual gain on the sale, calculates the tax owed, and claims the withheld amount as a credit. If the withholding exceeds the tax, the seller receives a refund. If the seller held the property for more than a year, long-term capital gain rates generally apply, which is often far less than 15 percent of the gross price.

Exceptions and reduced rates

Several exceptions reduce or eliminate withholding, and they turn on the buyer’s intended use and the price:

• If the buyer will use the property as a residence and the price does not exceed $300,000, no withholding applies. The buyer must have definite plans to live there for at least half the time the property is in use during each of the first two years.
• If the buyer will use it as a residence and the price is above $300,000 but not above $1,000,000, the rate drops to 10 percent.
• A seller who expects the actual tax to be less than the withholding can apply for a withholding certificate on Form 8288-B before or on the closing date. If the application is pending at closing, the buyer still withholds but may hold the funds in escrow until the IRS rules, then remits only the amount the certificate allows.
• A seller who is not actually a foreign person simply provides the non-foreign certification and no withholding applies.

The residence exception depends entirely on the buyer’s intent, and it shifts risk to the buyer if that intent turns out to be false. Buyers should not sign the residence statement casually to accommodate a seller.

State-level withholding on top of FIRPTA

New York adds its own layer. A nonresident individual selling New York real property must file Form IT-2663 and pay estimated state income tax on the gain at or before the deed is recorded, with limited exceptions. The settlement agent will not record without it. As of this writing, Virginia and the District do not impose a comparable withholding at closing, but state rules change, so confirm the current requirement with the settlement agent when you set the closing date.

Planning the sale before you list

Three steps prevent most problems. First, obtain an ITIN before you go to contract if you do not have one. Second, decide whether a Form 8288-B application makes sense; if your gain is small or you are selling at a loss, the certificate can keep most of your proceeds out of a months-long refund cycle. Third, build the withholding into the closing math, including the mortgage payoff and any broker commission, so there is no surprise at the settlement table. Our transaction counsel coordinates these items with the settlement agent, and our walkthrough of the closing sequence shows where the FIRPTA forms fall in the timeline. Owners who hold through an entity should also read our note on buying property through an LLC, since the entity’s tax classification determines whether the look-through rule applies.

If you live outside the United States and are preparing to sell U.S. property, a consultation with Capitol Law Partners can map the withholding, the forms, and the timing before you sign a contract. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

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