FIRPTA Withholding Rules for Foreign Sellers: 15%, Form 8288, and the $300,000 Exemption

FIRPTA collects a foreign seller's U.S. income tax at the closing table instead of waiting for a return months later. The IRS states the rule directly: "The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding."^[1]

The word carrying the weight is disposition, and the IRS reads it as broadly as the Internal Revenue Code does: a sale or exchange, a liquidation, a redemption, a gift, and other transfers all count.^[1] A transaction with no money changing hands can still trigger the obligation. A foreign parent deeding a Miami condo to an adult child, a foreign shareholder redeeming stock in a company that owns a building, and an ordinary listing closing through a title company all sit inside the rule. What matters is who transfers and what is transferred, not how the contract is labeled.

A U.S. real property interest, or USRPI, covers far more than a house. The IRS defines it as "an interest, other than as a creditor, in real property (including an interest in a mine, well, or other natural deposit) located in the U.S. or the U.S. Virgin Islands", plus certain personal property tied to the use of that real property, such as farming machinery.^[2]

Stock can be a USRPI too. An interest in a domestic corporation is treated as one unless it is established that the company was at no time a U.S. real property holding corporation during whichever is shorter of the period the interest was held or the 5-year period ending on the date of disposition.^[2] Foreign families in South Florida often hold a condo or a small commercial building inside a U.S. company and assume that selling the company sidesteps the withholding. Frequently it does not. Owners in that position should read the foreign-owned U.S. business tax reporting guide alongside our real estate + property management tax help.

The default is 15% of the amount realized. Transferees "are required to withhold 15% (10% for dispositions before Feb. 17, 2016) of the amount realized on the disposition",^[1] and the amount realized is a gross figure: the cash paid, plus the fair market value of any other property transferred, plus any liability the buyer assumes or that the property is subject to immediately before and after the transfer.^[3]

Two consequences follow, and both surprise first-time foreign sellers. Nothing in that calculation looks at what the seller paid for the property, so a sale at break even is withheld on exactly like a sale at a large profit. And a mortgage the buyer takes over increases the amount realized even though it never reaches the seller as cash. Entity level transfers run on their own track: a foreign corporation that distributes U.S. real property withholds 21% of the gain it recognizes on the distribution to foreign shareholders.^[3]

The buyer is. "In most cases, the buyer (transferee) is the withholding agent. The transferee must find out if the transferor is a foreign person. If the transferor is a foreign person and the transferee fails to withhold, the transferee may be held liable for the tax."^[1] That last sentence is the one buyers underestimate: the liability attaches to the party who failed to withhold, not to the party who failed to disclose.

The duty spreads past the buyer. Certain purchasers' agents and settlement officers also have to withhold,^[1] which is why a title or escrow company will not release funds without documentation of the seller's status. And when the seller is a U.S. business entity rather than an individual, that entity is its own withholding agent on the disposition.^[1] Buyers, agents, and closing teams who would rather settle the question before the closing date than argue about it afterward can bring in FIRPTA withholding help.

Two conditions have to hold at once, and price is only one of them. There is no withholding "in situations where the amount realized on the disposition of a USRPI is $300,000 or less and the transferee/buyer is planning on using the USRPI as a personal residence".^[4] A buyer under the threshold who intends to rent the unit out does not qualify, and a buyer who plans to move in but pays above the threshold does not qualify either.

The residence test has a defined shape. One or more buyers must have definite plans to live at the property for at least 50 percent of the days any person uses it, measured over each of the first two 12-month periods after the transfer, with vacant days excluded from the count.^[6] Days a family member spends there count as the buyer's own. Above the exemption sits a middle band: a residence purchase between $300,000 and $1 million draws reduced withholding under IRC 1445 rather than the full rate,^[5] so the price tier and the buyer's intended use both have to be settled before closing rather than assumed.

The withholding follows the foreign share, not the whole price. When a foreign person and at least one other person own the property, the amount realized is allocated among the transferors according to each transferor's capital contribution, and the buyer withholds on the portion allocated to the foreign owner.^[3] A U.S. citizen selling jointly with a nonresident spouse does not take the transaction outside FIRPTA, and the parties cannot assign the whole amount to the U.S. owner to make the withholding disappear.

Co-ownership also narrows the residence exemption. That exemption is written against the amount realized on the disposition, not against any one owner's allocated slice,^[4] so two foreign co-owners of a property that sells above the threshold cannot each claim to be under it. Transfers with several names on title, a trust in the chain, or an entity as seller are where the arithmetic most often goes wrong, and they are worth modeling before the contract is signed rather than in the final week: see our advisory solutions.

Form 8288-B is the application for a withholding certificate. The IRS sums up its purpose in one sentence: "Foreign persons use this form to apply for a withholding certificate to reduce or eliminate withholding on dispositions of U.S. real property interests."^[10] Instead of sending a fixed share of the sale price to the IRS, the buyer withholds the amount the certificate approves, which can be a fraction of the statutory figure or nothing at all.

For most foreign sellers this is the whole point of the exercise. Writing about a nonresident who qualifies for the IRC 121 exclusion on a personal residence, the IRS notes that the statutory withholding "on the amount realized from the sale could exceed the maximum tax liability on the sale", and that the seller may request a certificate so the buyer, through the escrow or closing agent, withholds at an approved reduced rate.^[7] A nonresident who genuinely lived in the property may also qualify for that exclusion where the eligibility test is met, though the maximum excludable gain is $250,000 because a joint return is generally unavailable to a nonresident filer.^[7] A property bought recently, sold at a thin margin, or carrying a large mortgage is the classic case in which 15% of the price is several times the tax on the gain. The certificate does not lower the tax. It stops the IRS from holding money that was never going to be tax.

Plan in months, not weeks. The IRS "will normally act on a withholding certificate application within 90 days of receipt of all information necessary to make a proper determination",^[8] and that clock only starts once the file is complete. An application mailed two weeks before closing has no realistic path to a certificate in time, which is why the decision to apply belongs to the listing stage rather than the closing stage.

Identification is the usual bottleneck. A foreign seller without a U.S. taxpayer identification number has to obtain one, and the IRS lets both requests travel together: the completed Form W-7 encloses the completed Form 8288-B, and the number itself is handled within 10 days of receipt while the certificate keeps its own track.^[8] Getting that package right the first time is what protects the closing date, because a rejected identification application resets the sequence. Foreign sellers who do not already hold an ITIN should start with ITIN application help well before the property goes under contract.

Withholding is not the tax. It is money held against a liability computed later, on a U.S. income tax return for the year of the sale, and anything held above the real liability comes back only once that return is filed. Because the withholding sits on the amount realized rather than on the gain,^[3] the gap is often large, and the IRS itself acknowledges that the statutory amount can exceed the maximum tax liability on the sale.^[7]

Two practical points follow. A seller who never files leaves the excess with the IRS indefinitely, because nothing refunds withholding that nobody claims. And a seller who files without the withholding statement for the transfer can have the credit questioned, which turns a routine refund into correspondence. Reporting the sale, claiming the credit, and reconciling it to the closing file is ordinary return work: that is what our individual tax return preparation handles, and the mechanics of the nonresident return itself are covered in the Form 1040-NR filing guide.