Under the U.S. FIRPTA (Foreign Investment in Real Property Tax Act), when a non-resident alien sells U.S. real estate, the buyer (or a designated intermediary) is generally required to withhold 15% of the sale price and remit this amount to the IRS. This withholding is not the final tax amount but rather a prepayment to ensure the foreign seller pays any U.S. taxes owed on the capital gain.
To avoid or reduce this withholding, there are several strategies:
FIRPTA Withholding Exemptions and Reductions
1.1 Sale Price ≤ $300,000 USD + Buyer Occupying as Primary Residence
If the sale price is $300,000 USD or less and the buyer intends to use the property as their primary residence, the law allows a full exemption from FIRPTA withholding.
- The buyer must intend to use the property as their main home for the majority of the two years following the purchase.
- If these conditions are met, no withholding is required.
1.2 Sale Price Between $300,000 and $1M USD + Buyer Occupying as Primary Residence
If the sale price is more than $300,000 USD but does not exceed $1M USD and the buyer is purchasing the property as their primary residence, the withholding rate can be reduced to 10% instead of 15%.
- The primary residence criteria are similar: the buyer must intend to live in the property at least 50% of the time for at least two years.
- If these conditions are met, you benefit from a 10% withholding rate.
1.3 Sale Price > $1M USD (or Other Situations)
In most other cases (e.g., the sale price exceeds $1M USD or the buyer does not plan to occupy the property as a primary residence), the standard withholding rate is 15%.
Obtaining a Withholding Certificate (Form 8288-B)
If you expect that the actual tax on your capital gain will be less than the withholding amount (10% or 15%, depending on the situation), you can apply for a Withholding Certificate from the IRS using Form 8288-B.
How It Works:
- Submit the Application: You (or your representative) submit Form 8288-B to the IRS either before or shortly after closing.
- IRS Review: The IRS evaluates whether the withholding exceeds the actual tax owed.
- IRS Decision:
- If the request is approved, the IRS issues a certificate authorizing a reduced withholding (or none at all).
- Without the certificate or if the request is denied, the buyer must withhold the full amount (10% or 15%).
Note: Obtaining a Withholding Certificate can take several weeks or months. Start the process early if you want the reduced rate to apply before closing.
Declaring the Sale and Recovering Overpaid Withholding
Even if the withholding (10% or 15%) is applied at the time of sale, you can recover any overpayment if the actual tax owed is less. To do this:
- Report the sale on your U.S. tax return (Form 1040-NR) for the year of the transaction.
- Calculate the actual tax on the capital gain (often at favorable long-term capital gains rates).
- Claim a refund for any overpaid amount if the withholding exceeds the tax owed.
You will need a valid ITIN (Individual Taxpayer Identification Number) to file this return.
Summary
- Price ≤ $300,000 USD + Primary Residence: No withholding.
- $300,000 USD < Price ≤ $1M USD + Primary Residence: Withholding reduced to 10%.
- Other Cases: Withholding at 15%.
- Form 8288-B: Allows you to request a reduced or waived withholding if the actual tax will be lower.
- Refunds: You can recover any overpayment by reporting the sale correctly to the IRS.
- Professional Assistance: Work with a tax expert to optimize and secure your transaction.
The key to avoiding or reducing FIRPTA withholding is to prove to the IRS that the actual tax owed will be less than the standard withholding or that you meet specific exemption or reduction criteria
