How to Claim Your FIRPTA Withholding Refund
Foreign sellers of U.S. property often overpay tax through FIRPTA withholding. Understand the steps to reconcile your actual tax liability and recover the funds.
The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted to ensure the U.S. government collects income tax from foreign individuals selling U.S. real estate. The primary mechanism is a mandatory withholding, where the buyer holds back a portion of the sales price and sends it to the Internal Revenue Service (IRS). This process covers potential taxes that are difficult to collect after a seller leaves the country.
The standard FIRPTA withholding is 15% of the gross sales price. For example, on a $600,000 property sale, $90,000 would be withheld. This rate can be reduced if the buyer intends to use the property as their personal residence. For properties sold between $300,001 and $1 million, the rate is reduced to 10%, and if the sale price is $300,000 or less, the withholding may be waived entirely.
This withholding acts as a prepayment of the seller’s tax obligation. The withheld amount is often higher than the actual tax liability, which is calculated on the net profit, not the gross sale price. This discrepancy creates the opportunity for a seller to claim a refund for the overpaid amount.
Determining the Actual Tax Due
The 15% FIRPTA withholding is applied to the gross selling price, but your actual tax liability is based on the net capital gain realized from the sale. The capital gain is the profit you make, which is the difference between the property’s selling price and its adjusted basis.
To find the adjusted basis, you start with the original purchase price of the property. To this amount, you add the cost of any significant capital improvements made during your ownership, such as a new roof or a kitchen remodel. Routine maintenance and repair costs are not included. From this total, you must subtract any depreciation that was claimed or could have been claimed, which is common if the property was used as a rental.
After calculating the net capital gain, you can determine the tax. The gain from selling U.S. real estate is subject to long-term capital gains tax rates, provided the property was held for more than one year. These rates are graduated and are lower than ordinary income tax rates.
For example, a property purchased for $400,000 with $50,000 in improvements has an adjusted basis of $450,000. If sold for $600,000, the capital gain is $150,000. The tax on this gain, calculated using capital gains rates, would be much less than the $90,000 withheld under FIRPTA. The difference between the tax due and the amount withheld is the potential refund.
How to Claim a FIRPTA Refund
Individual Taxpayer Identification Number (ITIN)
Before a foreign seller can claim a refund or reduce withholding, they must have a U.S. taxpayer identification number. If the seller is not eligible for a Social Security Number (SSN), they must obtain an Individual Taxpayer Identification Number (ITIN). To apply, you must file Form W-7, Application for IRS Individual Taxpayer Identification Number. The application requires proof of identity and foreign status, such as a certified copy of your passport, and the reason for needing the ITIN.
Method 1: Applying for a Withholding Certificate Before Closing (Form 8288-B)
A seller who anticipates that the withholding will exceed their actual tax liability can apply for a withholding certificate to reduce or eliminate the amount before closing. This is done by filing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. The completed application must be submitted to the IRS no later than the date of the property transfer.
The form requires transaction details, including the names of the seller and buyer, a property description, and the contract sales price. The application’s core is a calculation of the seller’s maximum tax liability, demonstrating that the standard withholding is excessive.
The IRS review process takes approximately 90 days. During this time, the buyer or their closing agent must still withhold the full amount but is permitted to hold these funds in an escrow account. If the IRS approves the application, it will issue a withholding certificate specifying the reduced amount of tax to be remitted, allowing the agent to release the excess funds from escrow to the seller.
Method 2: Filing a U.S. Tax Return After Closing (Form 1040-NR)
If a withholding certificate is not obtained before closing, the standard method to claim a refund is to file a U.S. income tax return for the year of the sale. The seller uses Form 1040-NR, U.S. Nonresident Alien Income Tax Return, to report the sale, calculate the precise tax on the gain, and claim the FIRPTA withholding as a tax payment.
A key document for this filing is Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. The buyer’s agent remits the withheld funds to the IRS, which then stamps a copy of Form 8288-A and mails it to the seller. This stamped form is the seller’s official proof of the amount withheld and must be attached to the Form 1040-NR.
The deadline for filing Form 1040-NR is April 15 of the following year for sellers who received U.S. wages, and June 15 for those who did not. After the IRS processes the return, it will issue a refund for any overpayment. The refund is typically issued as a paper check to the foreign address on the return, though direct deposit to a U.S. bank account may be an option.