When a foreigner sells US real estate, the buyer is required by law to withhold up to 15% of the sale price and send it to the IRS. Not 15% of the gain. 15% of the full price. The seller gets it back later by filing a US tax return - but in the meantime, the cash flow hit can be brutal. This is FIRPTA, and it catches a lot of Canadian and international sellers off guard. Here's how it actually works and how to soften it.
FIRPTA is an advanced collection mechanism, not a final tax. The buyer withholds 15% (sometimes 10%, sometimes 0%) of the gross sale price at closing, sends it to the IRS within 20 days, and the foreign seller files a US tax return for the year of sale to compute the actual tax on the gain and recover the difference.
The Foreign Investment in Real Property Tax Act was enacted in 1980 to make sure the US could tax foreign sellers of US real estate. Without FIRPTA, a foreign person could sell a Manhattan condo, take the money home, and never file a US tax return. The IRS wouldn't know the sale happened. The seller would owe the tax in theory, but practically the IRS had no way to collect.
FIRPTA solved this by putting the collection burden on the buyer. The buyer doesn't owe the seller's tax - but the buyer is required to withhold a percentage of the sale price and remit it to the IRS. The seller gets credited for the withheld amount when they file their US return showing the actual gain.
Two Code sections do the work:
The withholding rate depends on the buyer's intended use of the property and the sale price. There are three tiers:
The 0% and 10% tiers both require an individual buyer who will use the property as a residence. The buyer signs an affidavit at closing stating their intent. If the affidavit is signed truthfully, the lower rate applies.
The 50% personal-use rule is the catch. The buyer (or a family member) must plan to occupy the property for at least 50% of the days the property is used during each of the first two 12-month periods after closing. If the property is used 200 days in year one and the buyer's family is there 80 of those days, that's 40% personal use - the affidavit was wrong, and the buyer is technically liable for the under-withheld amount.
This affidavit is the buyer's risk, not the seller's. If the buyer signs it falsely and the IRS later discovers the property was a rental, the IRS can pursue the buyer for the additional withholding plus interest and penalties.
The buyer is the withholding agent. Within 20 days after closing, the buyer must:
The forms are mailed to the IRS Ogden Service Center, P.O. Box 409101, Ogden, UT 84409. The IRS stamps Copy B of Form 8288-A and mails it back to the seller. The seller needs that stamped Copy B to claim the withholding credit on their US tax return.
In practice, the closing agent (title company, escrow, or settlement attorney) usually handles the FIRPTA filings on behalf of the buyer. The withholding gets remitted directly from closing proceeds. But the buyer remains legally liable - if the closing agent botches the filing, the IRS can pursue the buyer.
If the standard withholding (15% or 10% of gross price) is far more than the seller's actual tax liability will be, the seller can apply for a withholding certificate using Form 8288-B. Filed before or at closing, this asks the IRS to authorize withholding at the actual expected tax amount instead of the formula amount.
Common scenarios where 8288-B makes sense:
The IRS generally takes about 90 days to process Form 8288-B. If the application is filed before or by the day of transfer, the buyer still must withhold the full amount at closing - but the buyer can hold the withheld amount in escrow rather than remitting it within 20 days. Once the IRS approves the certificate, the buyer remits only the reduced amount and releases the difference to the seller.
Critically, the withholding certificate request must be filed by the date of transfer. Filing it after closing means the standard withholding has already been remitted to the IRS, and the seller has to wait until they file their tax return to recover the over-withholding.
The IRS won't process Form 8288-B without a Taxpayer Identification Number. Foreign sellers who don't have a US Social Security Number need an Individual Taxpayer Identification Number (ITIN), obtained by filing Form W-7.
This creates a logistical knot: the ITIN application typically takes 7 to 11 weeks. If the seller doesn't already have one, they generally cannot file Form 8288-B in advance and instead get the standard withholding at closing. They then need an ITIN later to file the 1040-NR and recover the over-withholding.
The smart move for foreign property owners who anticipate selling: get the ITIN before listing the property. Form W-7 can be submitted at any time you have a "valid US tax purpose" - for foreign property owners with US-source rental income, the rental income filing already establishes that need.
Foreign sellers can use Section 1031 like-kind exchanges to defer FIRPTA tax, but the mechanics are particular. The seller must give the buyer written notice that the disposition is a non-recognition transaction, and the buyer can rely on the notice only if the foreign seller receives no cash or mortgage relief - any "boot" triggers withholding. The withholding certificate (Form 8288-B) is often filed simultaneously to confirm zero withholding.
If the buyer is also a foreign person, the 0% and 10% residence tiers do not apply (the residence exception requires an individual buyer, with the IRS interpreting "individual" in the context of a real intent to occupy). The 15% rate applies to the full price.
The residence exception specifically requires the property to be used as a residence. Vacant land, regardless of buyer's intent, is always subject to the full 15% withholding. There's no exception.
Since 2017, IRC §1446(f) extended a parallel withholding regime to dispositions of partnership interests where the partnership has US real estate or US trade or business assets. The rate is 10% of the amount realized. This catches a lot of foreign investors in US real estate funds, US LLCs holding property, and similar structures. The January 2026 revision of Form 8288 added new sections for §1446(f) partnership-interest transfers.
FIRPTA is a federal regime. Several states impose their own withholding on real estate sales by non-residents - and complying with the federal Form 8288 does not satisfy state requirements.
The states that matter most for cross-border deals:
Cross-border sellers in California, New York, and Hawaii in particular often face combined federal-plus-state withholding well over 20% of gross sale price. Recovering it requires both federal and state non-resident returns the year after the sale.
The buyer is personally liable for the tax that should have been withheld, plus interest and penalties, if FIRPTA is ignored. The IRS can pursue the buyer years later if the property was bought from a foreign seller and no Form 8288 was filed.
This is why title companies and closing agents now ask aggressively about seller residency. A seller who claims to be a US person without documentation (no SSN on file, no US driver's license, foreign address) is a red flag. The closing agent will typically require either: (a) the seller signs a non-foreign affidavit under penalties of perjury, certifying US person status; or (b) the standard FIRPTA withholding occurs.
For most foreign sellers, the 15% withheld is far more than the actual US tax on the gain. To recover the difference, the seller files Form 1040-NR for the calendar year of sale. The gain is reported on Schedule D and Form 4797 (if depreciable rental property). The withholding from Form 8288-A flows through as a credit on Schedule 3.
Timing: Form 1040-NR is due by April 15 of the year after the sale (or June 15 if the seller has no US wages and no US office). Extensions to October 15 are available. Refund processing for Form 1040-NR can take 6 months or longer - longer than typical 1040 refunds because the IRS manually verifies the FIRPTA credit against the 8288 records.
The seller will need:
Get an ITIN before listing the property. If you don't already have one, the application takes 7 to 11 weeks. Without an ITIN, you can't file Form 8288-B to reduce withholding, and you can't file Form 1040-NR to recover over-withholding. ITINs can be obtained well before any sale by filing Form W-7 with the appropriate exception or with a current-year US tax filing.
Calculate your expected tax liability before closing. If the 15% gross withholding is more than 1.5x your expected actual tax, file Form 8288-B before closing to reduce the withholding. This avoids tying up cash for 12 to 18 months waiting for a refund.
Coordinate the buyer's residence affidavit. If the buyer is an individual planning to occupy the property, make sure the closing agent prepares the residence-use affidavit so the lower 0% or 10% rate applies. Many closing agents default to 15% if the affidavit isn't proactively requested.
Track basis carefully. Original purchase price, capital improvements, depreciation taken (or that should have been taken under the "allowed or allowable" rule), and selling expenses all flow into the 1040-NR computation.
Don't forget the state. If the property is in a state with its own withholding regime, factor that in. The combined federal-plus-state withholding can exceed 20% of gross sale price in California, New York, and a handful of other states.