How Much Is FIRPTA Withholding on a Property Sale?

The Foreign Investment in Real Property Tax Act (FIRPTA) is a U.S. tax law that ensures foreign persons pay U.S. income tax on gains from the disposition of U.S. real property interests. This legislation helps the U.S. government collect taxes on income generated from the sale of real estate located within the United States.

Applicability of FIRPTA Withholding

FIRPTA withholding applies when a “foreign person” disposes of a “U.S. real property interest” (USRPI). A foreign person includes nonresident alien individuals, foreign corporations that have not elected to be treated as domestic, foreign partnerships, foreign trusts, and foreign estates. Resident alien individuals are not considered foreign persons for FIRPTA purposes.

A U.S. real property interest includes interests in real property located in the United States or the U.S. Virgin Islands, such as land, buildings, and associated personal property like farming machinery. This definition also extends to interests, other than as a creditor, in any domestic corporation that was a U.S. real property holding corporation (USRPHC).

FIRPTA withholding is triggered by dispositions of a USRPI. These include sales, exchanges, liquidations, redemptions, gifts, and other forms of transfers. The buyer, also known as the transferee, is responsible for withholding the tax, and if they fail to do so, they may be held liable for the amount.

Standard Withholding Rates

The standard FIRPTA withholding rate is generally 15% of the “amount realized” from the disposition of a U.S. real property interest. The amount realized includes the cash paid, the fair market value of other property transferred, and any liabilities assumed by the transferee. This withholding is based on the gross sales price, not the seller’s potential gain.

Special withholding rates apply to dispositions of residential property if the buyer intends to use it as a residence. If the amount realized is $300,000 or less, no withholding is required. For properties sold between $300,001 and $1,000,000, a reduced withholding rate of 10% applies.

For dispositions by foreign corporations, such as a distribution of a USRPI, the withholding rate is 21% of the gain recognized. A domestic corporation distributing a USRPI to a foreign person may be required to withhold 15% of the fair market value of the distributed property if the shareholder’s interest is a USRPI. These rates ensure tax collection on corporate-level transactions involving U.S. real property interests.

Applying for a Withholding Certificate

Foreign sellers can apply for a withholding certificate to reduce or eliminate the standard FIRPTA withholding amount before the transaction closes. This process involves submitting Form 8288-B to the IRS. The certificate can be requested if the seller’s maximum tax liability is less than the amount otherwise required to be withheld, or if they qualify for non-recognition treatment or an exemption from tax.

The application requires detailed information, including the U.S. Taxpayer Identification Numbers (TINs) of both the seller and the buyer, a description of the property, the sales price, and an estimate of the gain or loss. If a seller does not have a TIN, they must apply for an Individual Taxpayer Identification Number (ITIN) by submitting Form W-7 along with Form 8288-B. Supporting documentation, such as the sales contract and tax treaty provisions, is needed for a complete application.

The Form 8288-B application should generally be submitted as soon as the property is under contract, but before the closing date. The IRS processes these applications within 90 days, though actual processing times vary. If the application is still pending at closing, the statutory withholding amount must be withheld, but it can be held in escrow by the settlement agent instead of being remitted to the IRS until the certificate is issued.

Claiming a Refund of Overwithheld Amounts

The amount withheld under FIRPTA is considered an estimated tax payment, not necessarily the final tax due. Foreign persons can claim a refund for any overwithheld amounts by filing a U.S. income tax return for the tax year in which the property disposition occurred. This allows the seller to calculate their actual U.S. tax liability on the sale and receive a credit for the withheld funds.

For individuals, the appropriate tax form is Form 1040-NR, while foreign corporations generally file Form 1120-F. To receive credit for the tax withheld, the seller must attach a stamped copy of Form 8288-A to their tax return. This form is provided by the withholding agent.

The tax return should be filed according to standard IRS deadlines for the relevant tax year. Refunds can take several months to be issued, especially if there are backlogs or complexities in the case. An early refund request can sometimes be made by filing Form 843.