What Gets Withheld When You Sell
A buyer purchasing a U.S. real property interest from a foreign seller is generally required to withhold a percentage of the total purchase price, not a percentage of the seller's gain. A seller who has owned a property for years, financed it, and built up relatively little equity can watch a substantial chunk of the entire sale price disappear into withholding at closing, and the mechanisms that reduce it exist, but only for a seller who starts them well before the closing date.
What FIRPTA actually withholds, and from what
The Foreign Investment in Real Property Tax Act, codified principally at IRC §1445, requires the transferee, meaning the buyer, of a U.S. real property interest to withhold and remit to the IRS a percentage of the amount realized on the disposition where the transferor is a foreign person. The standard rate under §1445(a) is 15% of the amount realized, which is generally the gross sale price plus any liabilities assumed, without regard to the seller's basis, financing, or actual gain. A reduced 10% rate applies where the property is acquired for use as a residence and the amount realized does not exceed $1,000,000, and a full exemption from withholding, though not from tax, applies where the amount realized does not exceed $300,000 and the buyer acquires the property for use as a residence, meaning the buyer or a family member intends to reside there for a specified portion of the two years following the transfer.
The word that matters is gross. On a $700,000 sale with no reduced-rate exception available, the standard withholding is $105,000, calculated without reference to what the seller originally paid for the property, what mortgage is being paid off at closing, or whether the sale produces a gain or a loss at all. A seller selling at a loss, or a seller whose actual tax liability on the gain would be a small fraction of $105,000, is still subject to withholding on the full amount realized under the default rule, and the withheld amount is only recovered later, through a return, unless one of the reduction mechanisms described below is used before closing.
Who the withholding agent is, and why that person is exposed personally
Under Treas. Reg. §1.1445-1(a), the transferee is the withholding agent responsible for determining whether §1445 applies, withholding the correct amount, and remitting it to the IRS using Forms 8288 and 8288-A within 20 days of the transfer. In practice, the closing agent or settlement company typically handles the mechanics on the buyer's behalf, but the legal obligation, and the legal exposure for getting it wrong, sits with the buyer.
IRC §1461 makes a withholding agent that fails to withhold the required amount liable for the tax that should have been withheld, and that liability is independent of whether the seller ultimately pays the tax through a return. A buyer who purchases property from a foreign seller, does not withhold because it was not told the seller was foreign, or was given a facially adequate but false certification of non-foreign status, can be assessed for the withholding it should have collected, plus interest and penalties, even though it was not the party that received any tax benefit from the underlying sale. This is precisely why buyers, and the closing agents representing them, treat FIRPTA documentation as a closing requirement they will not waive, and why a foreign seller should expect withholding to be the default assumption at any U.S. closing unless a specific exception is affirmatively established.
The exceptions and reduced categories, described structurally
Several categories reduce or eliminate withholding, each resting on a different structural fact rather than on the seller's individual circumstances. The seller can certify non-foreign status. A transferor who is in fact a U.S. citizen, resident alien, or domestic entity provides a certification of non-U.S.-real-property-interest-transferor status under Treas. Reg. §1.1445-2(b), and withholding does not apply at all, though a buyer who has reason to know the certification is false cannot rely on it. The property can qualify under the residence exceptions described above, based on the amount realized and the buyer's intended use. The corporation whose stock is being sold can establish it is not a U.S. real property holding corporation, meaning less than 50% of the fair market value of its combined real property interests and other trade or business assets consists of U.S. real property interests, in which case a sale of its stock falls outside §1445 entirely. Or the transferor can obtain a withholding certificate from the IRS reducing the amount withheld to reflect the seller's actual expected tax liability, which is the mechanism available to a seller who does not fit any of the categorical exceptions but whose real tax liability is genuinely much lower than the standard percentage would produce.
| Category | Basis for reduced or no withholding | Authority |
|---|---|---|
| Non-foreign status | Seller certifies it is not a foreign person | IRC §1445(b)(2), Treas. Reg. §1.1445-2(b) |
| Residence, up to $300,000 | No withholding where amount realized is $300,000 or less and buyer will use as a residence | IRC §1445(b)(5) |
| Residence, $300,000 to $1,000,000 | Reduced 10% rate where buyer will use as a residence | IRC §1445(c)(4) |
| Not a U.S. real property holding corporation | Entity's real property interests are under 50% of its relevant asset base | IRC §897(c)(2), Treas. Reg. §1.897-2 |
| Withholding certificate | IRS approves a reduced amount based on the seller's actual expected tax | IRC §1445(c)(1), Treas. Reg. §1.1445-3 |
The withholding certificate: what it does and when it has to be started
An application for a withholding certificate is filed on Form 8288-B, and it asks the IRS to determine that the amount required to be withheld under the standard rules substantially exceeds the transferor's maximum tax liability on the transaction, so that a reduced amount, calculated to approximate the actual tax due, is withheld instead. Where the application is filed, Treas. Reg. §1.1445-1(c)(2) allows the buyer to withhold at the reduced amount pending the IRS's determination, provided the application was submitted on or before the closing date, though the amount otherwise required is generally held in escrow until the IRS responds rather than released to the seller immediately.
Timing is the entire mechanism. The application has to be submitted before the transfer, not after. A seller who waits until after closing to consider whether the standard 15% overstates the real liability has lost the ability to reduce the amount at the source, and is left with the slower path of recovering the excess through a filed return the following year, holding the full withheld amount without access to it in the meantime. The IRS generally aims to respond to a properly filed Form 8288-B application within 90 days, which means an application filed close to a scheduled closing date can leave the parties negotiating an escrow arrangement to bridge the gap between closing and the IRS's determination, rather than resolving the withholding amount cleanly at the table.
Reporting and the refund path
Whatever amount is actually withheld, the buyer reports and remits it using Form 8288, with Form 8288-A issued to the seller as a statement of the amount withheld, which the seller then uses as the equivalent of a withholding credit. The seller's own tax liability on the sale is computed separately, on the seller's income tax return for the year of sale, generally Form 1040-NR for an individual or Form 1120-F for a foreign corporation, reporting the gain and any depreciation recapture, and applying the amount shown on Form 8288-A as a credit against the tax actually due. Where the amount withheld exceeds the actual tax liability, whether because no withholding certificate was obtained in time, or because the certificate reduced the rate but not to the seller's exact final liability, the excess is refunded only after that return is filed and processed, which for a return reporting FIRPTA withholding commonly takes a number of months rather than weeks.
How the property is owned changes the mechanics
FIRPTA applies to a disposition of a U.S. real property interest, a term IRC §897(c)(1) defines broadly enough to reach not only direct ownership of real property but also an interest in a U.S. corporation that is or was, within the relevant testing period, a U.S. real property holding corporation. Selling the entity that owns the property, rather than selling the property directly, does not avoid FIRPTA by itself. If the entity meets the real property holding corporation threshold, a sale of its stock by a foreign shareholder is itself a disposition subject to withholding under §1445, generally at the same rate that would apply to a direct sale of the underlying real estate, computed on the amount realized on the stock sale.
A sale through a disregarded single-member U.S. LLC does not change the analysis in substance, since the disregarded entity is not the transferor for tax purposes and the withholding obligation is analyzed as if the foreign owner sold the property directly. A sale by a foreign corporation that itself owns the property, or by a foreign corporation that owns a U.S. real property holding corporation, layers a separate consideration on top of the withholding mechanics, since gain recognized by a foreign corporation on the disposition of a U.S. real property interest can also implicate the branch profits tax under IRC §884 once it reaches the corporate level, a separate charge from the FIRPTA withholding itself and computed under its own rules. How title to a property is actually held, directly, through a disregarded LLC, or through a foreign or domestic corporation, should be confirmed as one of the first steps in planning a sale, because it determines which withholding provision applies, at which rate, and which return ultimately reports the transaction.
State withholding runs on top of the federal amount
A number of states impose their own withholding requirement on the sale of real property by a non-resident seller, calculated independently of the federal FIRPTA amount and remitted to the state's own revenue department rather than to the IRS. Where a state withholding regime applies, a seller can face two separate withholding amounts taken from the same closing, one federal and one state, each governed by its own rate, its own exceptions, and its own certificate or waiver procedure for reducing the amount ahead of closing. Confirming whether the state where the property sits imposes its own withholding, and starting that state-level reduction process on the same timeline as the federal Form 8288-B application, avoids discovering a second, unplanned-for withholding amount at the closing table after the federal side has already been addressed.
What to do before a closing date is set
Confirm how the property is actually held and whether any entity in the ownership chain is or was a U.S. real property holding corporation. Estimate the actual tax liability on the sale, including any depreciation recapture from years the property was rented, well before a closing date is scheduled, to determine whether a Form 8288-B application is worth filing and, if so, file it with enough lead time to be resolved before or shortly after closing rather than months afterward. Confirm which certification or exception, if any, genuinely applies, since a certification signed without a factual basis exposes both the seller and, if the buyer had reason to know it was false, the buyer as well. None of this predicts an outcome for a particular sale, and the withholding rate, the availability of a reduced amount, and the ultimate tax liability all depend on facts specific to the property and the seller that should be confirmed well ahead of the closing table.