Real Estate Tax Calc
What FIRPTA is and who it applies to
FIRPTA — the Foreign Investment in Real Property Tax Act — is a U.S. law that ensures the IRS collects tax when a foreign person sells a U.S. real property interest. Because the foreign seller may leave the country after the sale and never pay U.S. tax, Congress put the collection obligation on the buyer.
Under FIRPTA, when a buyer purchases U.S. real property from a foreign person, the buyer must withhold 15% of the gross sale price and remit it to the IRS using Form 8288 and 8288-A within 20 days of closing. "Foreign person" includes nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, and foreign estates. U.S. citizens and green card holders are not foreign persons for FIRPTA purposes, regardless of where they live.
Note: the 15% withholding is not necessarily the actual tax owed — it is a prepayment. The foreign seller files a U.S. tax return and either gets a refund (if actual tax is less than withheld) or pays additional tax (if actual tax is more).
Exceptions and reduced withholding rates
Not every sale triggers full 15% withholding. Important exceptions include:
Personal use home under $300,000: No withholding is required if the buyer will use the property as a principal residence and the price is $300,000 or less.
Personal use home between $300,000 and $1,000,000: Reduced 10% withholding applies if the buyer will use the property as a principal residence.
Withholding certificate: A foreign seller can apply to the IRS for a reduced withholding certificate (Form 8288-B) if the actual U.S. tax owed on the gain is less than 15% of the gross price. The IRS may issue a certificate reducing the withholding to the actual tax amount. This process typically takes 90 days or more, so it should be started well before closing.
No gain recognized: If the seller has a tax treaty exemption or if there is no U.S. tax owed on the gain, the withholding obligation may be reduced or eliminated through the certificate process.
Tax rules for foreign rental property owners
For foreign persons who own U.S. rental property (as opposed to just selling it), there are ongoing U.S. tax obligations. Rental income from U.S. property is generally subject to U.S. tax. By default, the U.S. payer (a tenant or property manager) must withhold 30% of the gross rent for a foreign landlord.
However, a foreign landlord can elect under Section 871(d) to treat the U.S. rental income as effectively connected income (ECI), which means it is taxed on a net basis (gross rent minus deductible expenses) at regular graduated U.S. tax rates instead of the 30% gross withholding. This election is made on a U.S. tax return and is almost always more favorable than the 30% gross withholding — especially for rental properties with significant depreciation deductions.
A worked FIRPTA withholding example
Suppose a nonresident alien sells a U.S. rental property for a $600,000 gross sale price, and the buyer does not intend to occupy it as a residence. The default FIRPTA withholding is 15% of the gross price — $90,000 — which the buyer (through the closing agent) must remit to the IRS with Forms 8288 and 8288-A within 20 days of closing. Critically, this $90,000 is withheld on the gross price, not on the gain.
Now assume the seller's actual gain is modest — say the property was bought for $520,000, so the real gain is roughly $80,000, and the actual federal tax (long-term capital gains plus depreciation recapture) is well under $90,000. The seller has effectively over-withheld. They can either apply before closing for a withholding certificate (Form 8288-B) to reduce the amount held at closing, or file a Form 1040-NR after year-end to report the actual tax and claim the excess as a refund. Because the IRS can take months to process a refund, the certificate route is usually preferable when the gain is small relative to the price.
The withholding certificate process in detail
Form 8288-B lets a foreign seller ask the IRS to reduce FIRPTA withholding to the seller's actual maximum tax liability on the sale. The application should be filed on or before the closing date; if it is pending at closing, the buyer still withholds the full amount but may hold it rather than remitting immediately, pending the IRS determination. The IRS generally acts on these applications within about 90 days, so start early — ideally before the property is even under contract.
To support the application, the seller documents the amount realized, the adjusted basis (original cost plus improvements minus depreciation taken during the rental years), and the resulting gain, along with the tax computed on that gain including unrecaptured Section 1250 gain. A U.S. taxpayer identification number (an ITIN for individuals) is required for both the certificate application and the eventual return; foreign sellers who never obtained an ITIN should apply for one well in advance, because the withholding cannot be credited or refunded without it.
How FIRPTA interacts with the gain and depreciation recapture
FIRPTA is only a collection mechanism — it does not determine the actual tax. When a foreign person sells U.S. rental property, the underlying tax is the same structure a U.S. owner faces: long-term capital gain rates on the appreciation, plus unrecaptured Section 1250 gain taxed at up to 25% on the depreciation claimed (or allowable) during ownership. The 15% gross withholding is simply a prepayment against that liability, trued up when the 1040-NR is filed.
Because depreciation recapture can be a large piece of the tax, a foreign landlord who took years of depreciation may find the actual tax approaches or exceeds the 15% withholding even on a modest headline gain. Conversely, a property sold at little gain but with heavy prior depreciation can still owe substantial recapture tax. Foreign sellers should compute the full federal (and any state) tax before assuming the 15% withholding covers it — or that a refund is coming.
State-level withholding stacks on top of FIRPTA
FIRPTA is a federal regime, but several states impose their own nonresident withholding on real estate sales that applies in addition to the 15% federal withholding. California, for example, generally withholds 3.33% of the sale price (or an elected alternative based on gain) on sales by nonresidents; other states have comparable rules with their own rates and forms. These state withholdings are separate prepayments, reconciled on a nonresident state return.
A foreign seller therefore may face both federal and state withholding at closing, and must file both a federal Form 1040-NR and a nonresident state return to reconcile the amounts and claim any refund. Buyers and closing agents in states with their own withholding need to handle both obligations; missing the state piece can create the same kind of buyer exposure that missing FIRPTA does at the federal level.
Practical steps for buyers and for foreign sellers
For a buyer, the safest course is to assume FIRPTA applies unless you have clear documentation otherwise. Confirm the seller's status: a seller who is a U.S. person can provide a signed non-foreign affidavit (a certification of non-foreign status under penalties of perjury), which relieves the buyer of the withholding obligation. Do not rely on a verbal assurance or a treaty claim — without a proper affidavit or an IRS withholding certificate, the buyer must withhold, and a buyer who fails to withhold can become personally liable for the tax plus interest and penalties.
For a foreign seller, plan for FIRPTA from the moment you list. Obtain an ITIN early, gather basis and depreciation records, and evaluate the Form 8288-B certificate if your actual tax will be less than 15% of the price. Coordinate closing timing so the certificate application is filed before closing, and budget for the cash-flow hit of having 15% (plus any state withholding) held until your return is processed. Engaging a U.S. tax advisor before signing the contract almost always saves money and delay.
Frequently asked questions
Does the buyer or seller pay the FIRPTA withholding?
The buyer is legally responsible for withholding and remitting the 15% to the IRS. If the buyer fails to withhold, the buyer becomes liable for the tax.
Can a foreign seller get a refund of FIRPTA withholding?
Yes. The foreign seller files a U.S. nonresident tax return (Form 1040-NR), reports the actual gain, and receives a refund if the 15% withholding exceeded the actual tax owed.
Does FIRPTA apply if the seller claims a tax treaty exemption?
Possibly not, but the seller must still go through the withholding certificate process (Form 8288-B) to have the withholding reduced. The buyer cannot simply skip withholding based on the seller's claim of a treaty.
Is FIRPTA withholding based on the gain or the sale price?
The sale price. The default withholding is 15% of the gross amount realized, regardless of how much actual gain there is. That is why sellers with small gains often over-withhold and must either apply for a reduced-withholding certificate (Form 8288-B) or claim a refund on a U.S. return.
What is a non-foreign affidavit and how does it help the buyer?
It is a written certification, signed under penalties of perjury, in which the seller states they are a U.S. person and provides a taxpayer identification number. A valid affidavit generally relieves the buyer of the FIRPTA withholding obligation. Without it (or an IRS withholding certificate), the buyer must withhold or risk becoming liable for the tax.
Does a foreign landlord have to withhold 30% on rent, or is there an alternative?
By default a payer withholds 30% of gross rent paid to a foreign landlord. But the landlord can elect under Section 871(d) to treat the rental income as effectively connected income, which is taxed on a net basis at graduated rates after deducting expenses and depreciation — almost always a better result, especially for a leveraged, depreciating property.
How long does it take to get a FIRPTA refund?
It can take several months or more. The seller files Form 1040-NR after the tax year ends to reconcile the actual tax against the amount withheld and claim any excess. Because refunds are slow, sellers with small expected gains often prefer the Form 8288-B certificate route to reduce the amount held at closing in the first place.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.