FIRPTA withholding: 15% of the price, not the profit

A sum the buyer holds back when a foreign person sells US real estate, and pays to the IRS. In practice it is a deposit against the seller's US tax on the sale, not the tax itself. The seller then reclaims any excess by filing a return.

Generally 15% of the amount realised. The IRS sets out the rate and the main exceptions. Realised is the key word, because it points to the price rather than the profit.

So the withholding ignores what you paid for the place.

It ignores the mortgage you still owe on it too.

In short, a seller can hand over 15% of a price that left them with very little cash.

It may, depending on your residence. A UK resident is generally taxable on worldwide gains, so the same disposal can appear on both returns with two different numbers. In practice the computations differ on cost, on reliefs and on currency.

Relief for the American tax then comes through the credit on the British side.

GOV.UK explains the position on foreign income and gains, and the timing of the two filings rarely lines up.

Because the law puts the duty on them. If the buyer fails to withhold, the buyer can be left owing the money. That is why a title company will not simply take your word that an exception applies.

So the pressure you feel at closing comes from their exposure, not yours.

Understanding that helps. The buyer is not being difficult.

They are following a rule that makes them personally responsible for your tax.

Then the American gain calculation changes, because the rules expect depreciation for the years you let it. That reduces your cost basis and increases the gain on sale. Many people never knew this applied.

The rules treat it as claimable whether or not you ever claimed it.

So a let property frequently produces a larger American gain than the owner expects.

Two at closing and one if you want relief. The buyer reports and pays using Form 8288, and Form 8288-A is the statement that shows the amount taken on your behalf.

You need that 8288-A. It is your proof of the deposit.

So keep a copy before everyone scatters after closing.

The third form is 8288-B, which asks the IRS to reduce the withholding in advance.

Yes, and this is the part that stings most. The withholding runs on the price, so a sale at a loss still triggers it. The seller hands over 15% of a number that bears no relation to their gain.

The money is not lost.

Instead, you claim it back by filing a US return for that year.

However, that return cannot go in until the following filing season, so the cash stays with the IRS for months.

Two, and both depend on the buyer rather than on you. Nothing is withheld at $300,000 or less where the buyer will make the place their home. Between $300,000 and $1 million a reduced rate can apply, again resting on what the buyer intends to do with it.

The second exception has a test about occupation.

The buyer must plan to live there for at least half the days in each of the first two twelve-month periods.

So the exception turns on the buyer's plans, which you cannot control.

Then each owner gets looked at separately, which is the part people find counter-intuitive. The withholding follows each seller's own status and share, so a sale by a mixed couple is not automatically all withheld or all exempt. One half of the proceeds can carry withholding while the other half does not.

So ask the closing agent how they intend to split it. Different agents handle the allocation differently, and the figure on the completion statement is what you will have to live with.

Get the answer in writing before closing. Afterwards it becomes a refund claim rather than a conversation.

In our practice this is the question that most often changes the number. A couple who assumed the full 15% applied to everything frequently find that it does not.

A ruling from the IRS that the withholding should run lower, or stop at nothing at all. You apply on Form 8288-B, usually because the expected tax on the sale is far below 15% of the price.

The application goes in before closing.

That timing is the whole point, and it is where most people lose the benefit.

In practice the IRS takes time to respond, so this works when planned and fails when rushed.

As soon as the sale looks real, and certainly before anybody fixes the closing date. The IRS needs time, and a certificate that arrives after closing does nothing for the money already sent.

Start the moment you have a buyer.

You can usually begin preparing before that, since most of the input is your own cost records.

In our practice the sellers who recover the cash quickly are the ones who started this before the estate agent did.

Rarely. The 15% is a deposit, and the actual tax depends on your gain, your holding period and any depreciation you had to claim while letting the place. Often the real liability is far lower.

Sometimes it is nil, and the whole amount comes back.

So treat the withheld sum as a loan to the IRS rather than as a bill.

By filing a US tax return for the year of the sale and claiming credit for the amount withheld. You attach the 8288-A, which is why keeping it matters so much.

You also need a US taxpayer number to file.

Someone who has never filed may not have one, and obtaining it adds weeks.

Our guide to when a non-US spouse needs a tax number covers that process, and the IRS publishes Form W-7.

It can, because the rule looks at the seller rather than at how they came to own the place. An heir who is a foreign person and later sells faces the same withholding.

Estate questions often sit underneath.

A non-resident who dies owning US property has their own exposure, and the threshold there is low.

Our guide to US estate tax for non-residents sets out that $60,000 line.

A sequence that keeps the cash moving rather than parking it with the IRS.

Not with the withholding itself, which is a collection mechanism rather than a tax. The treaty matters for the underlying liability and for relieving double taxation once both returns are in.

So the 15% still comes off at closing.

Our double tax treaty relief service covers the relief side.

In short, treat the withholding and the tax as two separate problems with two separate fixes.

It narrows the case for a certificate. Where the expected tax is close to 15% of the price, applying buys little and costs time. The calculation is simply a comparison.

Work out the likely tax, compare it with the withholding, and see whether the gap justifies the effort.

For many ordinary sales at a gain, the answer is to let the withholding stand.

Ask early how they intend to handle FIRPTA withholding, and on what figure. Crucially, getting that answer weeks before closing leaves time to act on it. Ask whether they have seen a withholding certificate before.

Many have, and some will hold funds in escrow pending the IRS response.

So the practical handling of FIRPTA withholding varies by agent, and asking early is what gives you options.

Consider a British owner selling a Florida flat for four hundred thousand dollars, bought years earlier for rather more. The sale is a loss in dollars.

The buyer still withholds sixty thousand, because the rule runs on price. Nothing about the loss changes that at closing.

A certificate applied for in good time would have cut it to nothing. Applied for late, it arrives after the money has gone.

These figures are illustrative. The pattern is the common one: the cash is recoverable, and the delay is what hurts.

The first is learning about FIRPTA withholding at the closing table. By then the options have gone.

The second is assuming a loss means no withholding. The rule runs on the price.

The third is losing the 8288-A, which is the proof needed to reclaim the money.

The fourth applies for a certificate after closing, when nothing can change the amount already taken.

We work out the likely US tax on the sale early, which is what decides whether a certificate is worth applying for.

Then we handle the application and the return that reclaims the balance, so the two line up.

Our property and capital gains service covers both sides of a disposal, and fees stay fixed and agreed in writing. How we work sets out the process.

If a sale is on the horizon, talk to us before anybody fixes the closing date.