What happens when a foreign person sells U.S. real estate?

Withholding is based on the transaction

FIRPTA generally treats a foreign person’s gain from a U.S. real property interest as effectively connected income. The buyer is generally the withholding agent, even when a closing agent handles the paperwork. The amount realized can include cash, other property and liabilities assumed or taken subject to by the buyer. It is not simply the cash left after paying off a mortgage. Certain exceptions depend on the transaction and the buyer’s intended use.

Calculate the actual taxable gain separately

The seller’s final income tax depends on adjusted basis, selling expenses, depreciation and other applicable rules, rather than the gross withholding amount. Prior rental depreciation can affect gain and its tax treatment. An individual nonresident generally reports the sale on Form 1040-NR with the applicable supporting schedules. Entity sellers follow different return rules. A loss or small gain does not automatically excuse withholding at closing.

Consider a withholding certificate before closing

Form 8288-B can be used to request an IRS withholding certificate, including when withholding would exceed the expected tax. Applying does not mean approval is guaranteed or that the buyer can release all funds immediately. A timely pending application may affect when withheld funds must be remitted, but the buyer generally still withholds at closing while awaiting the decision. Coordinate the application, taxpayer identification numbers and closing instructions early.

Recover excess withholding through proper reporting

Forms 8288 and 8288-A generally document and transmit the withholding. Preserve the seller’s withholding evidence and reconcile it with the tax return; claiming a credit without the necessary records can delay processing. A refund is available only to the extent the allowable credit exceeds the final liability. If no identification number exists, address the ITIN or EIN process promptly. Also review earlier rental returns rather than assuming the sale resolves past noncompliance.

Common mistakes

• Calculating withholding only on sale profit.
• Assuming the title company’s withholding replaces the seller’s tax return.

Filing requirements

• Coordinate Forms 8288 and 8288-A with the buyer or closing agent.
• Evaluate Form 8288-B before closing and report the sale on the correct income tax return.

Potential penalties

• The buyer may be liable for required withholding, penalties and interest if FIRPTA duties are not met.

Related IRS forms

• Form 1040-NR
• Form 8288
• Form 8288-A
• Form 8288-B

What to consider next

• Confirm the seller’s tax status before signing closing certifications.
• Collect basis, improvement, depreciation and withholding records.
• Have Chirino USA review the closing and potential refund or certificate request.