Selling US property as a foreigner: ITIN, FIRPTA and Form 8288-B

FIRPTA withholding in plain terms

When a foreign person sells a US real property interest, the Foreign Investment in Real Property Tax Act (FIRPTA) makes the buyer withhold part of the price and send it to the IRS. The rate is generally 15% of the amount realized, which is the whole sale price (including any debt the buyer takes over), not your profit.

That withholding isn’t your tax bill. It’s a prepayment. Your actual tax is worked out on the gain when you file a US return, and the withholding is credited against it. If more was withheld than you owe, the IRS refunds the difference.

The buyer is the withholding agent. If the buyer doesn’t withhold when it should, the buyer can be held liable for the tax.

The buyer reports and pays the withholding on Forms 8288 and 8288-A, generally by the 20th day after closing.

Here’s why the gap matters. Say you bought a condo for $420,000 and sell it to an investor for $500,000. The buyer withholds $75,000. Your gain before selling costs and depreciation adjustments is $80,000, and the tax on that will be a fraction of the $75,000. Without a withholding certificate, you wait until you file your return to get the rest back.

Why the seller needs an ITIN

The IRS requires the US taxpayer identification numbers of both the buyer and the foreign seller on Forms 8288, 8288-A and 8288-B. A nonresident who isn’t eligible for a Social Security number meets that requirement with an ITIN.

Without one, three things go wrong:

• No withholding certificate. Form 8288-B isn’t processed without the TINs of all parties.
• No proof of withholding. The IRS stamps Copy B of Form 8288-A and sends it to you as evidence of the tax withheld. It won’t send it if your TIN is missing. Instead you get Letter 3794 telling you to apply for an ITIN.
• No refund. You claim the withholding on Form 1040-NR, and that return needs a TIN.

A foreign buyer can need one too. If you buy from a foreign seller, you’re the withholding agent and your TIN goes on Form 8288.

Form 8288-B: how a withholding certificate works

Form 8288-B asks the IRS for a withholding certificate that reduces or eliminates the amount the buyer must withhold. Either the seller or the buyer can file it. The form covers three kinds of request:

1. You’re exempt from tax on the sale or entitled to nonrecognition treatment.
2. Your maximum tax on the sale is less than the amount that would be withheld.
3. Special installment sale rules allow reduced withholding.

For the second ground you attach a calculation of the maximum tax, signed by you under penalties of perjury. The IRS asks for the signed sale contract, evidence of your adjusted basis (closing statements, improvement invoices, depreciation schedules), any depreciation recapture, the tax rates that apply, the tentative tax and any treaty reduction. You also show that you have no unsatisfied withholding liability from when you bought the property. Evidence includes the non-foreign certificate your own seller gave you, or a copy of the Form 8288 you filed and proof of payment if you bought from a foreign seller.

What happens next depends on timing:

• Submitted on or before closing. The buyer still withholds at closing, but doesn’t have to pay it to the IRS until the 20th day after the IRS mails the certificate or a denial. If the certificate allows less, only that amount goes to the IRS. You must tell the buyer in writing, on or before the day of transfer, that you’ve applied.
• Submitted after closing. A certificate issued after the transfer can authorize an early refund, so you don’t wait for your annual return.

The IRS says it will normally act within 90 days of receiving all the information it needs. If you already have an ITIN, you mail Form 8288-B to the Internal Revenue Service, P.O. Box 409101, Ogden, UT 84409.

Applying for an ITIN with Form 8288-B (Exception 4)

If you don’t have a TIN yet, you apply for the ITIN and the withholding certificate in one package. Normally a Form W-7 has to go in with a tax return, but Exception 4 covers people who are party to a sale by a foreign person, so no return is needed at this stage.

1. 1

   Sign the sale contract first

   The IRS won’t issue an ITIN for a future sale. You become eligible under Exception 4 once a legally binding contract exists.

2. 2

   Complete Form 8288-B

   Fill in the form and attach the maximum-tax calculation and supporting documents. You won’t have a TIN to enter yet.

3. 3

   Complete Form W-7

   Check box h (Other) and write “Exception 4” next to it. Give your foreign address and passport details.

4. 4

   Add your documents

   Your original passport or a copy certified by the issuing agency, the completed Form 8288-B, and a copy of the sales contract, Settlement Statement (HUD-1) or Closing Disclosure.

5. 5

   Mail it to the ITIN unit in Austin

   Send the whole package to Internal Revenue Service, ITIN Operation, P.O. Box 149342, Austin, TX 78714-9342, not to Ogden. The W-7 is processed first; if it’s rejected, the Form 8288-B isn’t processed.

When the two are filed together, the IRS says the ITIN request is processed within 10 days of receipt. If the W-7 is rejected, you’ll get Letter 3793 explaining what to fix, and you include a copy of it when you reapply. The document checklist covers what the IRS accepts as proof of identity and foreign status.

Timing: apply before closing

Start as soon as the contract is signed. The benefit of Form 8288-B comes from submitting it on or before the closing date: that’s what lets the buyer hold the withheld money until the IRS decides, instead of paying all of it over within 20 days.

Give yourself room. The IRS’s 90-day target starts only once it has everything it needs, and a rejected W-7 stops the whole package. Getting the passport certified or booking an acceptance agent can take time, so line that up while the sale is being negotiated.

TheITINapp can prepare and submit the Form W-7 part. We don’t prepare Form 8288-B or your tax return, so you’ll need to do those yourself or with a tax preparer.

Reclaiming withheld tax on Form 1040-NR

You file Form 1040-NR for the year of the sale, report the gain and claim the withholding as a credit. Attach the stamped Copy B of Form 8288-A. If the withholding is more than the tax, the difference is refunded.

The IRS treats gain from selling US real property as effectively connected with a US trade or business, even if you have no US business. That means it’s taxed under the same rules and rates that apply to US citizens and residents, after deductions, rather than at a flat rate. Depreciation you claimed on a rental reduces your basis, which increases the gain.

If you have no US wages, a calendar-year 1040-NR is due by June 15 of the following year. Form 4868 extends the filing date, not the date to pay any tax due.

Buying or renting out US property: when an ITIN is needed

You don’t need an ITIN to own US property as such. It becomes necessary when the tax system needs your number on a form.

Rental income: gross or net

By default, US rent paid to a nonresident is taxed at 30% (or a lower treaty rate) of the gross amount, with no deductions. Your tenant or property manager withholds it and gives you a Form 1042-S. In the IRS’s own example, a nonresident with $10,000 of rent from one house, all properly withheld, doesn’t need to file a return.

You can choose instead to treat all your US real property income as effectively connected income. Then only net income is taxed, at graduated rates, after expenses such as mortgage interest, property taxes, insurance, repairs, management fees and depreciation.

To make that work, you need an ITIN:

• You give your tenant or agent Form W-8ECI so they stop withholding 30% of gross rent. The W-8ECI instructions say a US TIN is required for the form to be valid.
• You file Form 1040-NR every year with Schedule E, and attach a statement making the choice in the first year.
• You must file on time to keep your deductions. For this rule the IRS counts a return as timely if it’s filed within 16 months of the due date.

The choice covers all your US real property income and stays in effect for later years. You can revoke it without IRS approval only within the time limits for amending the year you made it.