FIRPTA Tax Help | Selling Real Estate
Are you a nonresident who is planning to sell your US personal home, vacation home, or rental property? If so, you need to understand FIRPTA withholding.
FIRPTA stands for the Foreign Investment in Real Property Tax Act. It is the US law that requires tax withholding on the sale of US real property by foreign sellers. If you are like many nonresidents, the first time you may have heard about FIRPTA was when you put your house on the market—or when you went under contract to sell. FIRPTA can be a big tax surprise in the form of a 10%-15% withholding on the sales price of a property.
For example, on the sale of a $1 million home, the IRS can automatically withhold $150,000 at the time of closing. And this withholding can be held for months, even if no capital gains tax is owed. This is done to ensure that the IRS receives the taxes that may be due.
The real estate (or withholding) agent will send the withholding to the IRS—even if you expect a loss on the sale. Yes, you will get the withholding back, assuming you don’t have a big gain on the sale. But to get the cash, you have to wait until next year, file a US tax return, and request a refund. Not ideal, especially if you had other plans for the money.
So, do you need to just wait for a refund? Not necessarily. There are three options, each with pros and cons. We can help you determine which options you qualify for and walk you through the steps. We can also advise you on the common pitfalls since there can be delays by the IRS or mistakes made by real estate agents or withholding agents.
File an application to reduce or even eliminate the withholding. This involves filing Form 8288-B with the IRS, along with supporting calculations that show the actual tax you expect to owe on the sale. The filing must be done after the property goes under contract but before the closing date. This option helps you avoid an excessive withholding, which can free up your cash flow to do other things.
File a request for early refund of the FIRPTA withholding. If you weren’t able to obtain a Withholding Certificate from the IRS for a reduced amount of withholding, but you don’t want to wait until you file your tax return next year to request a refund, you can apply for an earlier refund. This option may be appropriate in limited circumstances.
Accept the automatic withholding and wait until the following February/March and file a US tax return to claim a refund. Of course, reducing or limiting the withholding in the first place is preferable. But, in cases where it’s not possible, this option may be the right one! It depends on the time of year, IRS backlogs, and other factors.
We help G-4 visa holders and other nonresidents who are selling property by:
- Preparing the proper forms (Form 8288-B, Application for Withholding Certificate), before closing, to reduce or eliminate this withholding requirement
- Preparing supporting documents and calculations for the Form 8288-B, to show the actual expected tax on the sale
- Helping explain to real estate professionals the steps they should follow to help their nonresident sellers obtain reduced withholding
- Filing Forms 843 and 8288-B to request an early refund of the withholding
- Filing income tax returns (Form 1040NR) for the year of the sale to properly report the sale—and to report the withholdings or request the refund
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Frequently Asked Tax Questions about FIRPTA
With the exception of G-4 visa holders (and certain other visa holders), most nonresident taxpayers live outside the US. This makes it hard for the IRS to collect US taxes from them. Since the sale of US real estate is subject to tax in the US, the IRS wants to be sure that nonresidents pay any tax that they owe. By making closing agents withhold large amounts of tax on the sale of US property, the IRS ensures that the sellers will not disappear without paying the appropriate tax.
In 1980, Congress enacted the Foreign Investment in Real Property Tax Act (FIRPTA) to achieve this goal. It created an automatic income tax withholding for foreign persons when they sell US real property.
The IRS takes a conservative approach (withholding more than necessary). Then, the burden is on the seller to show that the tax owed is less than that. The seller can do this by giving the IRS documents and calculations showing the actual gain or loss. That’s what the Form 8288-B and the US tax return are for.
We can help. If you haven’t closed yet, we can help you determine whether you qualify for reduced (or no) withholding on the sale. Applications for reduced withholding (Form 8288-B packages) can be submitted up to 1 day prior to the settlement date. Depending on how much time you have before closing, we will advise you on your options and how to set yourself up for the best chances of success. Then, we will work with you to prepare the Form 8288-B package.
In theory, yes. You can file a Form 843 (Claim for Refund), together with a Form 8288-B, to show the estimated tax on the sale. This is the IRS’s official process for obtaining an early refund of FIRPTA withholding. However, the IRS takes a long time to process these requests. Depending on the time of year, you may receive the refund faster if you wait until the filing season opens (late January) and just file a tax return (Form 1040NR) to report the sale and request a refund.
We help you weigh the considerations so you can choose the option with the best chance of getting your money back as quickly as possible. Then, we prepare the appropriate forms (Forms 843 and 8288-B or Form 1040NR) to support your case.
You’ll need information on the purchaser of your property and the estimated gain or loss on the sale. Note: This is why you have to wait until you are under contract—only then do you have the purchaser information and sales price for your property.
To obtain the reduced withholding, the Form 8288-B must include the following information, along with supporting documents and calculations:
- Name, address, and SSN of the purchaser
- Name, address, and ID of the withholding agent
- Details on the contract price, property type, and expected sale date
- Information on the property itself
- Confirmation that you have filed past US tax returns for the property, if needed (for example, if it was a rental property)
- Calculation of the gain or loss on sale (so you need information on the original purchase price, capital improvements, and rental depreciation)
- The reasons you would qualify for reduced withholding
Yes, the Withholding Certificate allows you to get an early refund (around closing time) of your FIRPTA withholding, but you still need to file a tax return to report the actual sale. Generally, you can file a tax return as early as late January of the following year. This is when the IRS typically opens the filing season. Also, you may need to file a state return to report any state tax owed on the sale.
Is this your first time filing US returns? No problem. We regularly help nonresidents with these filings. To learn more about FIRPTA, watch our video.
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