FIRPTA Withholding: How a Foreign Seller Recovered $67,500

A Canadian physician sold a Fort Lauderdale condo for $450,000, netting a modest gain of maybe $40,000 after seven years of appreciation and a roof replacement, and walked away from the closing table $67,500 lighter than she expected. That $67,500 was FIRPTA withholding under §1445: 15% of the gross sale price, wired to the IRS by the closing agent before she saw a dollar. She called me because her Canadian accountant told her the money was "gone to the IRS" and she assumed that meant a $67,500 tax bill on a $40,000 gain. It did not. It meant the IRS was holding $67,500 against a US tax liability that, once we actually computed it, came to roughly $6,000. The other $61,500 was hers to reclaim, and the only real questions were how fast and through which door.

The mechanics are worth slowing down on, because the number that gets withheld and the number she actually owed live in two different sections of the code and have almost nothing to do with each other. The Foreign Investment in Real Property Tax Act treats a foreign person's gain on US real property as income effectively connected to a US trade or business under §897, which is why it is taxable here at all and why a nonresident who owns nothing else in the country still files a US return for it. Section §1445 is the enforcement bolt-on: because the government cannot easily chase a seller who lives in Ontario after the wire clears, it makes the buyer the withholding agent and requires 15% of the "amount realized," meaning the gross sales price, to be sent to the IRS. Gain is irrelevant to the withholding calculation. A foreign seller who sells at a loss still gets 15% of the gross taken, which is precisely how a $40,000 gain generates a $67,500 hold.

The buyer files the withholding on Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, with the seller's share reported on the accompanying Form 8288-A. The IRS stamps the 8288-A and mails a copy back to the seller, and that stamped copy is the receipt. Without it, the seller cannot prove the withholding when it comes time to claim the credit, so the first thing I did on my client's file was confirm the closing agent had actually filed the 8288 and that a stamped 8288-A was coming. It had not arrived. That is common, and it is the first place these cases stall.

The 15% is withheld on the sale price, not the gain

FIRPTA withholding is 15% of the gross amount realized on the sale, not 15% of profit, which is why sellers with small gains or outright losses are the ones who overpay the most. On a $450,000 sale, the withholding is $67,500 regardless of whether the seller made $40,000 or lost $10,000. The rate has been 15% since the 2016 increase from the prior 10%; a reduced 10% rate still applies to certain residences sold for between $300,001 and $1,000,000 where the buyer will use the property as a residence, and the withholding drops to zero for a buyer-occupied residence at $300,000 or less under the §1445 exemption, provided the buyer signs the residency affidavit.

That residence exemption is narrow and often misunderstood. The buyer, not the seller, has to intend to use the property as a residence, and there is a specific test: the buyer or a family member must have definite plans to reside at the property for at least half the days the property is in use during each of the two 12-month periods following the sale. My physician client did not qualify for any reduction. Her buyer was an investor who planned to rent the unit, so the full 15% applied and the only path back to her cash was a refund or a withholding certificate.

Two ways to get the money back, and they run on different clocks

There are exactly two mechanisms to recover over-withheld FIRPTA: file a Form 8288-B withholding certificate before or around closing to reduce the amount withheld up front, or claim the withholding as a credit on a US tax return after the fact. The first is faster in theory but requires action before the money is gone; the second is the fallback once the wire has already cleared.

Form 8288-B, Application for Withholding Certificate, asks the IRS to calculate the seller's maximum tax liability in advance and authorize the closing agent to withhold only that amount, or nothing. If a properly completed 8288-B is filed on or before the closing date, the buyer is still required to withhold the full 15% but may hold it in escrow rather than remit it while the application is pending, and the IRS generally acts on these within 90 days. Filed correctly and early, an 8288-B could have kept most of my client's $67,500 out of the IRS's hands entirely. But she had already closed, the money was already wired, and no 8288-B had been filed. So we were on the second track.

The second track is the refund claim on Form 1040-NR, the nonresident return. This is where the seller reports the actual sale, computes the real gain under normal rules (basis, the roof she replaced, selling costs, depreciation recapture if the property had been rented), applies the credit for the withholding shown on the stamped 8288-A, and requests the difference back. For my client the arithmetic was straightforward once we had documentation: a $40,000 long-term gain taxed at nonresident graduated rates produced a liability near $6,000, and the $67,500 credit produced a refund of about $61,500. The refund is real, but it is slow. FIRPTA refund returns are worked by a specialized unit and routinely take four to six months, sometimes longer, and the IRS will not release a penny until it has matched the return against the buyer's filed Form 8288. If the buyer never filed, there is nothing to match, and the refund freezes.

That is exactly what happened here. The closing agent had collected the withholding but had not yet filed the 8288, so there was no stamped 8288-A and no record on the IRS side to match against. We spent more time chasing the closing agent for proof of filing than we did preparing the actual return. Once the 8288 was filed and the stamped 8288-A came through, the 1040-NR went in with the credit attached, and the refund landed a little under five months later. The lesson my client took from it, and the one I give every foreign seller who calls before closing rather than after, is that the withholding is not a tax and the buyer's paperwork is not optional: the money comes back, but only through a return that the IRS can reconcile against a filing you do not control.

One structural note for sellers who own US real estate through a foreign corporation or a US LLC rather than in their own name, because the withholding rules shift. A disposition by a domestic entity is generally not subject to §1445 seller withholding in the same way, but distributions and the entity's own status can trigger separate withholding and reporting, and the FIRPTA analysis on entity-held property is genuinely different. If that is your situation, the answers in this post do not map cleanly onto your facts, and you should walk the ownership structure through with your advisor before you sign anything.

Sources

• IRC §897 (taxation of gain on US real property interests held by foreign persons)
• IRC §1445 (withholding on dispositions by foreign persons; 15% rate, residence-based reductions, exemption at $300,000 or less)
• Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
• Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests
• Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests
• Form 1040-NR, U.S. Nonresident Alien Income Tax Return
• IRS.gov, FIRPTA Withholding and Withholding Certificates guidance