A foreign seller closes on a US rental property for $1.4 million. It was bought for $1.3 million, and after commissions the seller nets very little. At the closing table, $210,000 disappears. Most of it comes back eventually, but the money is gone for the better part of a year. FIRPTA withholding is not a tax on profit, it is a deposit measured against the gross price, and the most valuable thing a foreign seller can do is understand it early enough to file the one form that fixes it.
Who Is Legally Responsible for FIRPTA Withholding?
The buyer. IRC §897 makes gain from a foreign person's disposition of a US real property interest taxable as effectively connected income, and §1445 exists to collect it before the proceeds leave the country. §1445(a) puts the obligation on the transferee, who must deduct and withhold from the amount realized.
That is where transactions go wrong. Escrow officers, title companies, and closing attorneys handle the mechanics, but none is the person the statute names. Treas. Reg. §1.1445-1(e)(1) states that every person required to deduct and withhold under §1445 is made liable for that tax by IRC §1461, so a buyer who fails to withhold may be held liable for the tax plus applicable penalties and interest. The obligation is personal and does not evaporate at closing.
A second, narrower liability is often confused with the first. §1445(d) requires a transferor's or transferee's agent who knows a non-foreign affidavit is false to notify the transferee, and imposes liability on one who does not, capped at the compensation the agent derives from the transaction. That affidavit is the most common exception of all: under §1445(b)(2) no withholding is required if the transferor swears under penalties of perjury that it is not a foreign person and gives a US taxpayer identification number. A broker who knows the affidavit is false and stays quiet risks the commission, not the withholding.
What Counts as a US Real Property Interest?
A US real property interest, or USRPI, is defined in §897(c)(1) and reaches further than a deed. It covers interests in real property in the United States or the US Virgin Islands, including fee interests, co-ownership interests, leaseholds, options, and direct interests in mines, wells, and other natural deposits. It also covers any interest, other than solely as a creditor, in a domestic corporation, unless the taxpayer establishes the corporation was not a US real property holding corporation during the shorter of the holding period or the five-year period ending on the disposition date.
USRPI and USRPHC: The Definitions That Control Everything
Reference- USRPHC, §897(c)(2): a corporation is a US real property holding corporation if the fair market value of its USRPIs equals or exceeds 50% of the combined fair market value of its USRPIs, its real property interests outside the US, and its other assets used or held for use in a trade or business.
- Solely as a creditor: a conventional mortgage or note is not a USRPI. Debt carrying a right to share in appreciation or profits can be. Stock of a foreign corporation generally is not a USRPI either.
- Publicly traded, §897(c)(3): an interest in a regularly traded class of stock is a USRPI only for a holder who held more than 5% of that class during the applicable period. §897(k) sets the threshold at more than 10% for regularly traded REIT stock.
- Cleansing rule, §897(c)(1)(B): the interest is not a USRPI if the corporation disposed of all its USRPIs in fully taxable transactions and holds none on the disposition date. Since the PATH Act, §897(c)(1)(B)(iii) denies the rule if the corporation or any predecessor was a RIC or REIT during the applicable period.
The USRPHC rule is what makes stock sales a FIRPTA problem: a foreign person selling shares in a private domestic corporation whose principal asset is a building is disposing of a USRPI, and §1445(a) applies. §1445(b)(3) provides the escape, an affidavit from the corporation under penalties of perjury on one of two grounds: that it is not and has not been a USRPHC during the applicable §897(c)(1)(A)(ii) period, or that as of the disposition date interests in it are not USRPIs by reason of the §897(c)(1)(B) cleansing rule. Either branch requires an actual asset valuation rather than an assumption.
Is the 15% Applied to the Sale Price or the Gain?
To the amount realized, which functions as the gross sales price. Treas. Reg. §1.1445-1(g)(5) defines it as cash paid or to be paid, plus the fair market value of other property transferred, plus the outstanding amount of any liability assumed by the transferee or to which the interest is subject immediately before and after the transfer.
Nothing on the seller's side reduces it. Not basis, not the mortgage paid off from proceeds, not the commission. A $1.4 million contract with a $1.05 million payoff still produces $210,000 of withholding out of $350,000 of gross cash, before commissions and closing costs take their share.
Allocation matters when title is shared. Withholding applies only to the portion of the amount realized allocable to each foreign transferor, allocated by capital contribution, and Treas. Reg. §1.1445-1(b)(3) deems a husband and wife to have each contributed 50% of their aggregate capital. A US citizen married to a nonresident alien selling jointly faces withholding on half the price, not all of it.
When Does the $300,000 Exception or the 10% Rate Actually Apply?
Both depend on the same residence test, and it is stricter than the shorthand circulating online. It is not a price threshold anyone can use, and it turns on the buyer's plans and the price, not the seller's gain or tax.
§1445(b)(5) eliminates withholding when the amount realized does not exceed $300,000 and the property is acquired by the transferee for use as a residence. §1445(c)(4) substitutes 10% for 15% under the same condition when the amount realized does not exceed $1,000,000. Above $1,000,000 the rate is 15% regardless of the buyer's plans. Without the residence condition it is 15% at every price. Treas. Reg. §1.1445-2(d)(1) supplies the mechanics, and every element is a real constraint.
Both provisions are self-executing, with no form filed, so the buyer who carries the liability is the one exposed if the position is wrong. A buyer who takes title in a corporation, whose closing agent applies the $300,000 exception anyway, is on the hook for 15% plus interest. Document the basis for the position at closing.
What Are Forms 8288 and 8288-A, and What Is the 20-Day Deadline?
Form 8288 is the withholding return the agent files. Form 8288-A is the per-transferor statement, one for each foreign seller, attached to it. Both, with full payment, are due by the 20th day after the date of transfer.
"Date of transfer" is defined and it is not always the closing date. Treas. Reg. §1.1445-1(g)(8) makes it the first date on which consideration is paid or a liability is assumed by the transferee, and expressly excludes earnest money, good faith deposits, and similar sums primarily intended to bind the parties to a contract. A conventional deal starts the clock at closing, but an early payment of actual purchase price starts it sooner. For a §1445(e)(2), (3), or (4) distribution, the same regulation instead fixes the date of transfer as the date of the distribution.
The form is organized by the provision creating the obligation: Part I for transferee withholding under §1445(a), Part II for entity withholding under §1445(e), Part III for a transferee's withholding on a partnership interest under §1446(f)(1), and Part IV for a partnership's withholding under §1446(f)(4), with Part V for the related refund claim. A partnership completing Part IV attaches Form 8288-C, a separate statement rather than a part of Form 8288.
The IRS retains Copy A, stamps Copy B and forwards it to the foreign transferor, and the transferee keeps Copy C. That stamped Copy B is what the seller attaches to the US return to claim credit. Per the Form 8288 instructions, if the transferor's TIN is missing the IRS sends a letter requesting it before providing the stamped Copy B, stalling the refund, so a foreign individual without an SSN should apply for an ITIN on Form W-7 as part of the transaction. Failure to file and pay carries §6651 penalties plus interest on top of the tax.
How Does a Form 8288-B Withholding Certificate Work?
Form 8288-B is the application for a withholding certificate and the only mechanism that brings withholding down toward the seller's real tax. Treas. Reg. §1.1445-3(a) authorizes the IRS to reduce or eliminate withholding by certificate, and applications sort into six bases. Picking the right one determines what the IRS reviews.
The Six Bases for a Form 8288-B Application
Reference- Nonrecognition or exemption from US tax. No US tax is due, whether under a Code nonrecognition provision or a treaty. Governed by Treas. Reg. §1.1445-3(d).
- Maximum tax liability. The most common basis. Under Treas. Reg. §1.1445-3(c)(1) it is the maximum amount that could be imposed as tax under §871 or §882 on this disposition plus the transferor's unsatisfied withholding liability, meaning any §1445 amount the transferor should have withheld when acquiring the property and did not.
- Special installment sale rule. A certificate matched to the payment schedule rather than full withholding out of the down payment.
- Agreement for payment of tax with security. Treas. Reg. §1.1445-3(e) permits a written agreement with the IRS backed by security, naming bonds with surety, bonds with collateral, and letters of credit.
- Blanket withholding certificate. Covers multiple dispositions by the same transferor, for an owner unwinding a portfolio rather than selling once.
- Any other basis. A residual category. Note also the special rules in Treas. Reg. §1.1445-3(b)(5) for applications relying on the §121 exclusion and §1.1445-3(b)(6) for §1031 like-kind exchanges.
The maximum tax liability computation is the substance of most applications, and the IRS reviews it substantively. A complete application shows the contract price, documented cost basis, supported capital improvements, prior depreciation, selling expenses, and the resulting gain broken into rate components. For a rental, that means separating unrecaptured section 1250 gain, taxed at a maximum 25% rate under §1(h), from long-term capital gain taxed at up to 20%. Depreciation that was allowable but never claimed still reduces basis under §1016(a)(2), and applications that quietly ignore it come back revised upward.
Procedure is unforgiving. IRS guidance requires taxpayer identification numbers for all parties to the transaction; a transferor without an SSN or ITIN can file Form W-7 with the application. Filings go to the Ogden Service Center address in the current instructions, and the IRS issues the certificate, or denial, to transferor and transferee both. On timing, Treas. Reg. §1.1445-3(a) states the IRS will act not later than the 90th day after receipt, and two qualifiers in that same paragraph explain why real elapsed time runs longer. First, an application is received on the date that all information necessary for the Service to make a determination is provided, so a filing missing a TIN or basis substantiation has not started the clock at all. Second, in unusually complicated cases the Service notifies the applicant by the 45th day that more time is needed and supplies a target date for final action. Under Treas. Reg. §1.1445-3(f)(2) amending an application after submission extends the processing period as well.
What Happens to the Money While the Application Is Pending?
The withholding still happens. The remittance is what waits. Under Treas. Reg. §1.1445-1(c)(2)(i), when an application has been submitted on or before the date of transfer, the transferee must still withhold, but the amount withheld, or a lesser amount as determined by the IRS, need not be reported and paid over until the 20th day following the IRS's final determination. The Form 8288 instructions state the same rule from the filer's side: the 20th day after the IRS mails a copy of the certificate or the denial.
Which branch applies depends on who filed, and one of them carries a condition buyers routinely miss. Subparagraph (A) covers an application submitted by the transferee, who obviously knows it exists. Subparagraph (B) covers an application submitted by the transferor, and the deferral there is conditioned on the transferor giving the transferee written notice before the transfer stating the transferor's name, address, and taxpayer identification number, a brief description of the property, and the date the application was submitted. Without that notice the buyer has no deferral, the ordinary deadline governs, and the buyer is late on day 21 with a certificate application still sitting at the IRS. A buyer told at the closing table that "the seller filed an 8288-B" should get that notice in writing.
That suspension is the entire practical value of applying before closing. The closing agent normally holds the funds in escrow rather than sending them to the IRS. When a certificate approving a reduced amount arrives, the escrow remits that amount with Form 8288 and releases the balance to the seller. A seller whose maximum tax liability is $40,000 on a sale that would otherwise trigger $210,000 of withholding gets $170,000 back at the end of the certificate process, not on a return that cannot be filed until the following year.
Filing after the transfer date is materially worse: the ordinary 20-day deadline applies, the money goes to the IRS, and the certificate supports an early refund under Treas. Reg. §1.1445-3(g) rather than a release from escrow. Two cautions. A pending application does not authorize the buyer to reduce withholding meanwhile, and the escrow arrangement is a private contract, not a creature of the regulations, so the buyer's statutory liability persists whatever the escrow instructions say.
How Does FIRPTA Apply to Partnerships, Trusts, and Estates?
The answer turns on what the entity is doing: selling a USRPI it holds, distributing one to its foreign owners, or serving as the interest that is itself sold. Where a domestic partnership sells a USRPI it holds, the governing rule is not §1445(e)(1). When a foreign partnership, trust, or estate disposes of a USRPI, it is a foreign person and the buyer withholds under §1445(a) normally. When a domestic trust or estate disposes of a USRPI, the obligation flips to the entity: §1445(e)(1) requires it to withhold at the highest rate of tax in effect under §11(b), currently 21%, multiplied by the gain realized to the extent allocable to foreign beneficiaries. The buyer withholds nothing, because the seller is a US person.
A domestic partnership, including an LLC treated as a partnership, is carved out of §1445(e)(1) for its own USRPI disposition gain, and only that. Treas. Reg. §1.1446-3(c)(2)(i) provides that a domestic partnership otherwise subject to both regimes is subject to the payment and reporting requirements of §1446 only and not §1445(e)(1) with respect to partnership gain from the disposition of a USRPI. Its other §1445(e) duties are untouched. So a domestic LLC with foreign members that sells a building does not file Form 8288 and does not withhold a flat 21%. It withholds on effectively connected taxable income allocable to its foreign partners at the §1446 rate keyed to partner type, and reports on Forms 8804 and 8805. A buyer purchasing from that LLC still withholds nothing under §1445(a), but a foreign member should expect a Form 8805, not a stamped Copy B of Form 8288-A, and should not treat the absence of FIRPTA withholding at closing as the absence of a US tax obligation.
The §1445(e) Series: Four Different Withholding Bases
Reference- Gain. §1445(e)(1) for domestic trusts and estates, §1445(e)(2) for a foreign corporation distributing a USRPI on which gain is recognized under §897(d) or (e), and §1445(e)(6) for a qualified investment entity, a REIT or qualifying RIC, on distributions treated as gain from the sale of a USRPI. All three run at the highest §11(b) rate, currently 21%.
- Amount realized. §1445(e)(3), at 15%, but only where the distributing corporation is or has been a USRPHC during the applicable §897(c)(1)(A)(ii) period and the distribution is a transaction to which §302 or part II of subchapter C applies. A distribution by a domestic corporation that was never a USRPHC is outside the provision.
- Fair market value. §1445(e)(4) applies 15% to the fair market value of a USRPI distributed by a partnership, trust, or estate to a foreign partner or beneficiary, measured at the time of the taxable distribution. This is a third base, distinct from both gain and amount realized, and it is currently suspended (see below).
- Interest disposition. §1445(e)(5), operative only through Treas. Reg. §1.1445-11T(d)(1), reaches a foreign partner's sale of an interest in a partnership that is 50%/90% USRPI-heavy, with the transferee as the withholding agent. In practice §1446(f) now governs most such sales at 10% of the amount realized (see below).
One of these categories is suspended outright, and the fourth, §1445(e)(5), is far narrower in practice than its statutory text suggests. Treating either as broader than it is causes real harm. §1445(e)(4) withholding on taxable distributions is suspended. Its implementing regulation, §1.1445-5(f), is reserved, and Treas. Reg. §1.1445-11T(c) states that no withholding is required with respect to the distribution of a USRPI by a partnership, trust, or estate, deferring the obligation to the effective date of a later Treasury decision under §897(g). A partnership that withholds 15% here is wrongfully taking money from a foreign distributee.
§1445(e)(5) also puts the duty on a different party. The statute applies only to the extent provided in regulations, §1.1445-5(g) is reserved, and the only operative rule is the carve-in at Treas. Reg. §1.1445-11T(d)(1): dispositions of interests in partnerships where fifty percent or more of the value of the gross assets consists of USRPIs and ninety percent or more consists of USRPIs plus cash or cash equivalents. It does not reach interests in trusts or estates, and it does not reach an ordinary real estate partnership that holds an operating business, receivables, or other non-cash assets and so fails the 90% test. Note also that (e)(5) does not shift the obligation to the entity the way (e)(1) does. The statute makes the transferee of the partnership interest the withholding agent.
That last category is where the modern overlap sits. A foreign partner selling a partnership interest faces §864(c)(8), treating the gain as effectively connected, and §1446(f), imposing 10% withholding on the amount realized, which is the rule that actually applies to most such sales. Identifying which statute governs is the first question in the engagement, and a foreign investor exiting a US real estate partnership should not assume the answer is 15%.
Withholding Is Not the Tax: What Does the Seller Actually Owe?
Nothing about withholding fixes liability. §897(a) treats gain from a foreign person's disposition of a USRPI as effectively connected income, taxed on a net basis at graduated rates on a US return rather than at the 30% flat rate applied to FDAP income. Our guide to Form 1040-NR and nonresident alien taxation covers the ECI and FDAP distinction underneath this.
For an individual, gain on property held more than a year is long-term capital gain at 0%, 15%, or 20%, with the portion attributable to prior straight-line depreciation treated as unrecaptured section 1250 gain taxed at a maximum 25% under §1(h). The net investment income tax does not apply, because §1411(e)(1) provides that §1411 does not apply to a nonresident alien individual. For a foreign corporation, effectively connected gain is taxed under §882 at the §11 corporate rate, currently 21%, with a possible branch profits tax under §884 on top.
The seller files Form 1040-NR, or Form 1120-F, reports the sale, and claims the withholding as a credit by attaching the stamped Copy B of Form 8288-A. No refund is paid without a filed return. Two items are easy to lose: state withholding is entirely separate, with several states running their own nonresident-seller regimes, and a foreign seller who actually lived in the property may qualify for the §121 exclusion of up to $250,000, or $500,000 on a joint return, a provision keyed to ownership and use rather than residency status. That exclusion belongs in the maximum tax liability computation on the Form 8288-B.
Bottom Line
Every expensive FIRPTA outcome traces to a date. The one lever that works is Form 8288-B submitted on or before the date of transfer, which suspends the remittance deadline and lets the funds sit in escrow rather than at the IRS. Submitted after the transfer, the identical form only accelerates a refund, and the buyer still owes the full amount on day 20. Where the seller applied, the buyer's deferral additionally depends on receiving written pre-transfer notice. The gap between filing on the right side of that date and the wrong side is measured in months and often in six figures, which is why the application belongs in the contract timeline and not in the closing checklist.
If you are selling US real property as a foreign person, buying from one, or holding US real estate through a structure that may be a USRPHC, our international tax and cross-border tax teams handle the computation, the Form 8288-B application, the ITIN filing, and buyer-side reporting as one engagement. Have questions about FIRPTA withholding and Form 8288-B? Contact TS CPA for a free consultation. We respond within the same day.
Official IRS and Government Sources
- IRS: FIRPTA Withholding
- IRS: Withholding Certificates
- IRS About Form 8288
- IRS Instructions for Form 8288
- IRS About Form 8288-B
- IRC Section 897
- IRC Section 1445
- IRC Section 1461, Liability for Withheld Tax
- Treas. Reg. Section 1.1445-1
- Treas. Reg. Section 1.1445-2
- Treas. Reg. Section 1.1445-3
- Treas. Reg. Section 1.1445-11T, Temporary Rules
- Treas. Reg. Section 1.1446-3