Selling U.S. Property as a Foreign Owner? FIRPTA's 15% Withholding and Form 8288-B

Say you own a home in Los Angeles and sell it for $2 million. On closing day, only about $1.7 million lands in your account. Where did the other $300,000 go? (This is a hypothetical example.)

Your agent didn't take it. If the seller is a foreign person, the buyer is generally required by law to withhold part of the price and send it to the IRS. This post explains how that withholding works and an often-overlooked tool: Form 8288-B.

What is FIRPTA?

FIRPTA (the Foreign Investment in Real Property Tax Act) sets up a withholding system for foreign persons selling U.S. real estate. "Foreign person" here generally means someone who is a foreigner for tax purposes, meaning neither a U.S. citizen nor a green card holder.

The basic rules:

When the seller is a foreign person, the buyer generally must withhold 15% of the amount realized (the sale price)
The withheld amount is generally due to the IRS within 20 days after closing
Certain residence purchases may qualify for a reduced rate or an exception, so check the latest IRS rules

The key point: it's based on the sale price, not your gain

This is the most common misunderstanding. A hypothetical example:

You bought for $1,900,000
You sell for $2,000,000
Your gain is only about $100,000 on paper
But the withholding is 15% of the sale price: $300,000

That $300,000 isn't your final tax bill. It works more like a deposit. Your actual tax is calculated when you file your return, and any excess is generally refunded through that filing, which can take a while.

Form 8288-B: Application for Withholding Certificate

If you don't want to wait until tax filing to recover excess withholding, you can file Form 8288-B (Application for Withholding Certificate). If the IRS approves it, it issues a certificate allowing the buyer to withhold less, or even nothing.

According to the IRS, it generally applies in situations like these:

Your actual tax liability is much lower than 15%, for example because you have little or no gain, or a high cost basis
The sale qualifies for nonrecognition or an exemption, such as a qualifying 1031 exchange
The sale is structured as an installment sale

You have to qualify for a reduction. Not everyone can eliminate withholding entirely.

Timing is everything

When you file matters a lot:

The application should be submitted before closing, or on the closing date at the latest
After it's filed, the buyer still withholds the money, but it can stay in escrow until the IRS makes a determination
IRS processing times vary. The commonly cited estimate is roughly 90 days, but it can be longer or shorter

The later you apply, the longer your money may be tied up.

Don't forget California's Form 593

On top of federal FIRPTA, California has its own real estate withholding rules, using Form 593. Withholding is generally 3⅓% of the sale price, with an alternative calculation based on gain. It's a separate set of rules and needs to be calculated separately. (I'll cover Form 593 in detail in my next post.)

Pre-sale checklist

[ ] Confirm whether you're a foreign person for tax purposes
[ ] Work with a CPA familiar with FIRPTA to estimate your actual tax before you list
[ ] Evaluate whether Form 8288-B makes sense for you
[ ] Tell your agent and escrow officer about your application timeline
[ ] Plan for California Form 593 withholding at the same time
[ ] Keep records of your purchase cost, improvements, and other supporting documents

Planning to sell U.S. property from abroad?

If you live overseas and are thinking about selling a home in Los Angeles or Southern California, reach out. I can help you organize the timeline and documents and coordinate with your CPA and escrow. For tax questions, rely on your CPA's professional advice.