Selling U.S. Property as a Foreign Owner: How to Reduce or Recover FIRPTA Withholding

How much is withheld

• Generally 15 percent of the amount realized on the disposition
• 10 percent where the property is acquired by an individual buyer for use as a residence and the amount realized does not exceed $1,000,000
• No withholding where the property is acquired by an individual buyer for use as a residence and the amount realized does not exceed $300,000

The residence exceptions depend on the buyer's intended use and require the buyer to have definite plans to reside at the property for a minimum period. They are not something the seller can claim unilaterally, and closing agents often apply the standard rate unless documentation supports an exception.

Withholding is not the tax

The amount withheld is a credit against the seller's actual U.S. income tax on the gain. A foreign individual's gain from U.S. real property is treated as effectively connected income, taxed on a net basis — the sale price minus the adjusted basis and selling costs — at the applicable rates, including long-term capital gain rates where the property was held more than a year. Depreciation previously claimed or allowable on rental property increases the gain and may be taxed at a higher rate.

Reducing withholding before closing: Form 8288-B

A seller may apply for a withholding certificate on Form 8288-B asking the IRS to reduce or eliminate withholding, typically because the maximum tax on the expected gain is lower than the standard withholding amount, or because the seller has a loss. If the application is submitted on or before the date of closing, the buyer or closing agent may hold the withheld funds rather than remitting them until the IRS acts on the application. The IRS generally processes applications within a period of weeks to months, so it should be prepared well in advance.

What the application requires

• A U.S. taxpayer identification number for each seller — an ITIN for individuals, an EIN for entities — or a pending ITIN application submitted with it
• The purchase price, improvements and depreciation history supporting the adjusted basis
• A calculation of the maximum tax liability on the expected gain
• Information about the buyer and the property

Recovering excess withholding after the sale

If no certificate was obtained, or if the certificate still resulted in more withholding than the final tax, the seller recovers the difference by filing a U.S. income tax return for the year of sale — Form 1040-NR for individuals or Form 1120-F for foreign corporations — and claiming the withholding as a credit. The seller should receive Form 8288-A, the IRS-stamped statement of withholding, which supports the credit. Refunds are paid after the return is processed, and delays are common when identification numbers or stamped statements are missing.

Co-owners and spouses

Where a property is owned by two foreign individuals, such as spouses, each is a separate transferor and each generally needs a taxpayer identification number, a separate Form 8288-A and a separate return. A property owned through a U.S. LLC that is disregarded is treated as owned by its foreign owner for these purposes; a property owned through a U.S. corporation or a foreign corporation is subject to different rules.

Common problems

• Starting the ITIN and withholding certificate process after the closing date is set
• Missing basis records, especially for improvements and closing costs from the original purchase
• Failing to file a return to recover withholding, leaving refunds unclaimed
• Not reporting the sale in the seller's home country, which may also tax the gain and allow a credit for U.S. tax
• Florida documentary stamp tax and other closing costs being confused with federal FIRPTA withholding

Sources and official references

• IRS — FIRPTA withholding
• IRS — Exceptions from FIRPTA withholding
• IRS — Withholding certificates (FIRPTA)
• IRS — About Form 8288-B