When a foreign person sells U.S. real estate, the buyer is legally required to withhold 15% of the gross purchase price and remit it to the IRS. This isn't a tax, it's a credit against the seller's eventual U.S. tax liability. But it ties up massive amounts of capital at exactly the wrong time.

The Withholding Mechanics

FIRPTA withholding (ยง1445) applies to any "disposition of a U.S. real property interest" by a "foreign person." This includes:

  • Direct sale of real property
  • Sale of shares in a U.S. Real Property Holding Corporation (USRPHC)
  • Certain distributions from REITs, partnerships, and trusts

The withholding rate is 15% of the gross selling price, not the gain. On a $5M property with $1M in gain, the default withholding is $750,000, despite the actual tax liability being roughly $200,000-$350,000.

On a $5M sale, FIRPTA withholding of $750K versus an actual tax liability of $250K means $500K of your money sits with the IRS for 6-18 months until you file a return and claim the refund. We file withholding certificates to bring the withholding in line with actual tax, recovering that $500K at closing.

Withholding Certificate Applications

IRS Form 8288-B allows sellers to apply for a reduced withholding certificate. The application shows the IRS the expected gain, applicable deductions, and treaty benefits, demonstrating that the actual tax liability is lower than the default 15%.

Processing takes 90 days on average. This means the application must be filed well before closing. Sellers who wait until the deal is near completion don't have time to obtain the certificate, and the full 15% is withheld.

California Adds Another Layer

California imposes its own withholding on nonresident sellers: 3 1/3% of the gross selling price (or 9.3% of the gain, whichever is elected). This is in addition to FIRPTA.

Combined federal and California withholding can exceed 18% of the gross price, a massive cash flow hit that's largely preventable with advance planning.

Common Mistakes We See

  • Waiting too long: Filing 8288-B after the deal is under contract leaves insufficient processing time
  • Wrong entity analysis: Not determining whether the seller is a USRPHC, which changes the withholding rules
  • Ignoring treaty benefits: Many treaties reduce or eliminate FIRPTA withholding for certain property types
  • Forgetting state withholding: Federal planning without California creates a separate cash trap
FIRPTA withholding is not optional. But the amount withheld is negotiable, if you plan early enough to file the right applications.

This article is for general informational purposes only and does not constitute tax, legal, or investment advice. Business owners should consult qualified tax and legal advisors before entering into a transaction.