FIRPTA: why 15% is withheld when you sell and how to recover it

When a foreign person sells U.S. real estate, the Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer to withhold 15% of the sale price and send it to the IRS. Withholding is computed on the full price, not on the gain, so it is almost always larger than the tax actually owed.

When withholding is lower

If the buyer will use the property as a residence and the price does not exceed $300,000, there is no withholding. If the price is between $300,000 and $1 million and the same use condition is met, withholding drops to 10%.

The reduced withholding certificate

Before closing, the seller can ask the IRS for a reduced withholding certificate on Form 8288-B, showing that the actual tax will be lower. If the application is pending at closing, the closing agent may hold the amount instead of sending it until the IRS responds.

What the buyer files

The buyer, usually through the title company, files Forms 8288 and 8288-A within 20 days after closing. The seller receives a stamped copy of Form 8288-A as proof of the withholding.

How the money is recovered

The seller files a nonresident return, Form 1040-NR, reports the actual gain on the sale and claims the withholding as a credit. The difference is refunded. Filing that return requires an ITIN, which can be applied for together with it. The better documented the property's cost and improvements, the lower the gain and the larger the refund.