A foreign owner selling U.S. real estate can face federal withholding equal to 15% of the amount realized on the sale, even when the taxable gain is much smaller.
That distinction matters. FIRPTA withholding is generally not the seller’s final tax. It is an advance payment that the seller later claims against the actual U.S. tax liability. But without advance planning, a substantial amount of the seller’s proceeds may remain tied up after closing.
The best time to address FIRPTA is not after the sale. It is while the transaction is being negotiated and before escrow closes.
FIRPTA Withholding Is Based on the Sale, Not Just the Gain
The Foreign Investment in Real Property Tax Act, commonly called FIRPTA, generally requires the buyer to withhold when a foreign person disposes of a U.S. real property interest.
For a conventional real-estate sale, the general withholding rate is 15% of the amount realized. The amount realized can include cash, the fair market value of other property transferred, and liabilities assumed by the buyer or attached to the property.
That can produce a withholding amount far greater than the seller’s eventual federal tax.
Consider a simplified example:
- Sale price: $5 million
- Estimated taxable gain: $1 million
- Default FIRPTA withholding: $750,000
- Illustrative maximum federal tax supported by the transaction analysis: $250,000
The exact tax depends on the seller, ownership structure, adjusted basis, depreciation, selling expenses, holding period, available exclusions, and other facts.
The 15% Rate Does Not Apply in Every Case
Several exceptions or reduced-withholding rules may apply.
For example, withholding generally may be eliminated when the amount realized is $300,000 or less and the buyer meets the requirements to use the property as a residence. A 10% rate may apply when the amount realized exceeds $300,000 but does not exceed $1 million and the buyer meets the residence requirements.
Other transactions may qualify for reduced or eliminated withholding because:
- The seller is not a foreign person for FIRPTA purposes.
- The sale produces a loss or relatively small taxable gain.
- The seller qualifies to exclude some or all of the gain from the sale of a principal residence.
- A nonrecognition provision applies.
- The IRS approves a withholding certificate based on the seller’s maximum anticipated tax liability.
These rules are fact-specific. They should be analyzed before the closing agent calculates the final settlement proceeds.
Using Form 8288-B to Request Lower Withholding
When the statutory withholding materially exceeds the seller’s expected federal tax, the seller or buyer may apply for an IRS withholding certificate using Form 8288-B.
The application generally includes:
- The purchase agreement and anticipated closing date
- The seller’s adjusted tax basis
- Capital improvements and depreciation
- Selling expenses
- The expected gain or loss
- The applicable federal tax calculation
- Ownership and taxpayer-identification information
- Support for any exemption or nonrecognition position
The quality and completeness of this submission matter. The IRS states that it will normally act within 90 days after receiving all information necessary to make a proper determination. An incomplete application can delay the process.
The application should be filed as early as the transaction permits and no later than the date of transfer.
If the IRS has not acted by closing, the buyer generally must still withhold the statutory amount. However, when a proper application was submitted on or before the transfer date, the buyer generally does not remit the withheld funds to the IRS until after the IRS issues its determination. How the funds are held while the application is pending should be coordinated with escrow (usually escrow holds the funds).
This is why “we filed the form before closing” and “the seller received all excess proceeds at closing” are not necessarily the same result.
California Has a Separate Withholding System
A sale of California real estate may also be subject to California withholding. This is separate from FIRPTA and requires a separate analysis.
California generally provides two calculation methods:
- 3 1/3% of the sales price, or
- An alternative calculation based on the estimated gain multiplied by the seller’s applicable maximum California tax rate.
Under the 2026 Form 593 instructions, the alternative rate for an individual or trust is 12.3% of the estimated gain. Different rates apply to corporations, S corporations, partnerships, and financial institutions.
California withholding is also a prepayment rather than the final California tax. However, California generally does not provide an early-refund procedure for excess real-estate withholding. Avoiding unnecessary California withholding at closing can therefore be especially important.
Four Mistakes That Can Tie Up the Seller’s Proceeds
1. Waiting until the week of closing
A withholding-certificate application requires tax calculations and supporting records. Beginning the process shortly before closing may leave insufficient time to prepare a complete submission or coordinate with escrow.
2. Estimating basis from memory
Purchase records, improvements, prior depreciation, ownership changes, and selling expenses all affect the expected gain. An unsupported basis calculation can delay the application or produce the wrong withholding request.
3. Treating every foreign seller the same
The correct analysis depends on whether the seller is an individual, corporation, partnership, trust, or disregarded entity. Multiple owners and changes in residency or entity classification create additional issues.
4. Addressing FIRPTA but overlooking California
Reducing federal withholding does not automatically reduce California withholding. Both systems should be addressed before the settlement statement is finalized.
What to Do Before the Property Goes Into Escrow
If a sale is being considered, begin by gathering:
- The original closing statement
- Records of capital improvements
- Depreciation schedules
- Current ownership documents
- The proposed purchase agreement
- Estimated selling expenses
- Prior U.S. federal and state returns
- U.S. taxpayer-identification numbers for the sellers
A cross-border tax advisor can then estimate the federal and California tax exposure, determine whether reduced withholding is available, and coordinate the required filings with the seller, attorney, buyer, and escrow company.
The Bottom Line
FIRPTA withholding is mandatory when the rules apply. Excess withholding often is not.
The difference comes down to timing, documentation, and a defensible calculation of the seller’s actual tax exposure. Address those issues before closing, and a foreign seller may avoid having substantially more cash withheld than the transaction requires.
If you are selling U.S. real estate and live outside the United States, involve your tax advisor before the closing date is fixed.
This article is for general informational purposes only and does not constitute tax, legal, or investment advice. Withholding requirements and final tax liabilities depend on the facts of each transaction.
