FIRPTA withholding on sale of U.S. real estate

Your Guide to State, Local, Federal, Estate + International Taxation

FIRPTA withholding, international tax, IRS, global businessThe Foreign Investment in Real Property Tax Act of 1980 – a.k.a FIRPTA – gave rise to the withholding requirement when a foreign person sells U.S. real estate. The withholding requirement, which increased from 10% to 15% for sales on or after February 17, 2016, applies to the gross sale price of the property, not the net profit. This means when a non-US person sells a U.S. real property, 15% withholding tax is withheld and remitted to the IRS, unless an exception applies.

Some common exceptions to the 15% withholding

  • If the sales price is between $300,000 and $1,000,000 and the buyer signs an affidavit, they will use the property as a primary residence for the required time period, the rate of withholding is reduced from 15% to 10%. To meet the “primary residence” rule, the buyer must attest they plan to use the property personally for at least 50% of the total days of usage for each of the next two years. Thus if the property is used for 6 weeks each year, 4 weeks personally and 2 weeks as a rental, then the “primary residence’ rule is satisfied.
  • If the sales price is less than $300,000 and the buyer signs an affidavit they will use the property as a primary residence for the required time period, withholding is not required.
  • If the seller’s ultimate tax liability is lower than the required tax withholding, withholding may be reduced or eliminated. To qualify for this exception, the seller must obtain a certificate from the IRS excusing them from or reducing the withholding. This certificate is requested by filing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, with the IRS on or before the actual date the property is sold.

Steps to obtain a withholding certificate

If the seller wished to reduce or eliminate the required withholding on the property sale, a withholding certificate is generally required prior to closing on the sale. The buyer is ultimately responsible for the 15% withholding and will want to make sure the proper documentation is in place before allowing a reduced amount of withholding. The buyer and seller will usually engage a title company in a fiduciary role to make sure all requirements are met. If the seller has timely filed the 8288-B form and is still awaiting a reply from the IRS at the time of sale, the title company should hold the withholding tax in trust for 90 days or until a response is received from the IRS. If no certificate of reduced withholding has been received in 90 days, then the full original required withholding amount (either 10% or 15% of the gross selling price) should be submitted to the IRS. If the IRS has accepted the Form 8288-B and issues a certificate of reduced withholding, the title company will then submit the withholding amount provided on the exemption certificate to the IRS and release the remaining funds to the seller within 20 days of receipt. If the IRS rejects the 8288-B and requires withholding, the title company must also remit the full required withholding amount to the IRS.

Please note, regardless of whether the nonresident seller owes tax or does not owe tax, they are still required to obtain a U.S. tax identification number (ITIN) and file a nonresident income tax return to report the sale. If the seller does not have a U.S. tax identification number, they must apply for one at the time of filing Form 8288-B. If the seller is an individual who does not qualify for a Social Security Number, they will need to apply for an Individual Tax Identification Number (ITIN) by attaching Form W-7, Application for IRS Individual Taxpayer Identification  Number, to the 8288-B. If the seller already has a valid ITIN, the 8288-B will be filed at the address in Ogden, Utah provided in the 8288-B instructions. If a W-7 is required, the forms needed must be filed at the IRS address in Austin, Texas provided in the W-7 instructions.

Form 8288 and 8288-A

When real estate is purchased from a non-US person, the buyer is required to file Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, to report and pay the FIRPTA tax withholding. Form 8288 is due within 20 days of the sale. However, if a withholding certificate application is still pending at the date of sale, Form 8288 is not due until 20 days after the IRS issues the certificate or notice of denial. Tax should be withheld at the time of sale, but does not need to be sent with Form 8288 until that time.

Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, is a form that shows the FIRPTA withholding allocated to each seller. There are three copies of Form 8288-A:  Copy A, B, and C.  Copy C is retained in the buyer’s files. Copies A and B are sent to the IRS with Form 8288. The IRS will stamp Copy B and send it to the seller. It is very important for the seller to keep this stamped copy as it will need to be attached to their tax return so they can receive credit for the withholding.

Information required when filing for an ITIN and a withholding certificate

The following items must be submitted by the seller to the IRS on or before the date of sale if the seller wants to obtain a timely withholding certificate. Please note that many local title companies will NOT wait to hear back from the IRS on the withholding certificate approval due to the risks of late submission of the withholding amount. However, to obtain a valid withholding certificate and an ITIN, the following items should be provided in the submission package:

  • Form 8288 (generally prepared by the title company)
  • Forms 8288-A, Copies B and C
  • Form 8288-B, with original signature of the seller
  • Form(s) W-7, with original signature of the seller(s) (if an ITIN is needed)
  • Passports certified by the original issuer for each seller (if an ITIN is needed)
  • The HUD closing statement on the original purchase of the property by the seller
  • The HUD closing statement on the sale of the property by the seller
  • The signed original contract of sale on the current sale of the property
  • A spreadsheet calculating the net gain on the sale
  • Receipts to prove improvements listed on the net gain calculation

The IRS should still issue a withholding certificate even though the title company has submitted the full required withholding amount. At that point, the seller or their CPA may provide a copy of the certificate and the stamped copy B of Form 8288-A to the IRS and an early refund of excess withholding tax may be obtained. Even if this occurs, the seller MUST file a U.S. federal and state income tax return to report the sale of the real property for the year of the sale.

Please be sure to contact a qualified tax professional to assist with your FIRPTA withholding filings. This information is general in nature and should not be relied upon.

Jill A. Helm, CPA