Foreign Person Sold U.S. Real Estate and Too Much FIRPTA Tax Was Withheld

The amount withheld had been calculated from the sale price, not his profit. He had mistaken a tax prepayment for the final bill.

The client's situation

The client lived outside the United States and held U.S. real estate as an investment. The property had been rented before the sale. At closing, funds were withheld under the Foreign Investment in Real Property Tax Act, generally called FIRPTA. He assumed the settlement agent's withholding completed his U.S. tax obligations.

His records were spread across the purchase closing file, property manager statements and renovation invoices. He had not compared the withholding with the taxable gain. We needed both the sale documents and the property's full tax history to determine whether the withholding exceeded his actual federal liability.

What went wrong

FIRPTA withholding generally is a collection mechanism, not a final calculation of income tax. Treating it as final can mean leaving an available refund unclaimed and failing to file a required return. It can also obscure additional tax due when withholding is insufficient. The closing statement alone does not calculate adjusted tax basis or depreciation-related gain.

The tax or reporting requirement

For a foreign seller, FIRPTA withholding is generally 15% of the amount realized, typically the gross sale price, not 15% of the gain or cash received after paying off a mortgage. Certain exceptions or reduced rates may apply, including rules involving a buyer's residential use. The applicable closing rules must be checked from the transaction facts.

A nonresident individual generally reports the taxable U.S. real property sale on Form 1040-NR with the appropriate gain schedules. Gain depends on amount realized, selling expenses and adjusted basis. Basis generally reflects acquisition cost and qualifying capital improvements, reduced by depreciation allowed or allowable during rental use. Depreciation-related gain can receive different tax treatment from the rest of the gain.

The seller claims the withholding credit documented by Form 8288-A and generally attaches the IRS-stamped copy to the return. If the stamped form has not arrived, we review the instructions and supporting evidence rather than assume the credit is lost or submit an unsupported figure. A taxpayer identification number is needed to process the return and match the credit.

Forms potentially involved:

• Form 1040-NR — nonresident sale-year return
• Schedule D and Form 8949 — capital gain reporting as applicable
• Form 4797 — business or rental property disposition as applicable
• Form 8288-A — FIRPTA withholding credit evidence
• Form 8288-B — prospective withholding certificate request
• Form W-7 — ITIN application when required

The potential IRS exposure

Failing to file can delay recovery of excess withholding and risk losing a refund if applicable claim deadlines expire. Incorrect basis or missing depreciation can distort the gain and lead to IRS adjustments. If the actual tax exceeds the credit, the seller may owe additional tax and interest, with applicable penalties. Withholding is not a guarantee that the sale produced a refund.

How Chirino USA analyzed the situation

Chirino USA reconciled the purchase and sale closing statements, capital improvement invoices and rental depreciation schedules. We distinguished deductible maintenance from capital improvements and checked prior rental reporting. A mortgage payoff did not become a deduction from taxable gain merely because it reduced the cash delivered at closing.

We verified the seller's nonresident status for the sale year, taxpayer identification information and Form 8288-A details. We then calculated the gain, including applicable depreciation recapture or unrecaptured section 1250 gain treatment, and compared total return liability with the available withholding credit. Other U.S. income for the year also had to be considered.

How we addressed the issue

We prepared Form 1040-NR reporting the sale with the appropriate schedules and claimed the supported FIRPTA withholding, attaching the Form 8288-A copy as required. If the seller lacks an SSN and is not eligible for one, Form W-7 can generally accompany the return to request an ITIN, with the required identity and foreign-status documentation. We checked that need before submission.

For a future sale, we recommended evaluating Form 8288-B early. An IRS withholding certificate may authorize reduced withholding when supported by the expected liability. Applying does not itself eliminate withholding obligations; timing and remittance rules still apply. Planning before closing can be more useful than trying to reconstruct the transaction afterward.

The result

The prepared return established the actual tax calculation and requested the excess withholding as a refund. Any refund depends on IRS processing and verification; no amount or payment date was promised. The client now understands that the withholding credit belongs in the sale-year filing rather than being treated as the final cost of selling.

What other taxpayers in similar situations should know

• Keep purchase records and improvement invoices until well after sale.
• Preserve rental depreciation schedules even if another preparer handled them.
• Review withholding certificates before closing and refund deadlines afterward.

How Chirino USA can help

Chirino USA Accountants & Advisors specializes in U.S. international tax matters for foreign individuals, foreign-owned U.S. businesses, and Americans in the U.S. and abroad. If your situation sounds similar, we can review what was filed, identify any exposure, and help you decide on the appropriate next step. You can email us or message us on WhatsApp, in English or Spanish.

Sources and official references

• IRS — FIRPTA Withholding
• IRS — About Form 8288-A
• IRS — About Form 8288-B
• IRS — Instructions for Form 1040-NR
• IRS — Instructions for Form W-7