Is FIRPTA withholding based on the sale price or the gain?
Key takeaway
FIRPTA withholding on a foreign person's sale of U.S. real property is generally based on the amount realized, and the seller's gain is not the starting point. FIRPTA is the Foreign Investment in Real Property Tax Act. The withholding rule reaches owners of U.S. real property who are foreign persons, including a spouse who is treated as a foreign person.
Withholding applies on a gross basis
Practitioners describe FIRPTA withholding as a tax applied on a gross basis. The withholding percentage is applied to the amount realized in the sale, so the calculation does not begin with the seller's profit or loss.
An illustration shows the mechanics. An owner buys a condominium and later sells it for the same price that was paid. Estate planning practitioners describe the IRS as withholding on that gross sale price, even though the sale produced no gain.
Spouses treated as foreign persons
Withholding may apply to a sale by a spouse who is treated as a foreign person for FIRPTA. Practitioners describe the withholding amount in that situation as generally based on the amount realized. A surviving spouse who holds U.S. real property and is treated as a foreign person falls within that description.
Estate planning practitioners describe also a pending application for a withholding certificate as not automatically eliminating the withholding obligation for that spouse.
Forms that report and transmit withholding
Form 8288 and Form 8288-A report and transmit withholding on foreign persons' sales of U.S. real property. The IRS describes these forms as the reporting channel for the withholding that a foreign-person seller's sale triggers.
Certain distributions to foreign beneficiaries are also reported and transmitted on these forms. An owner who holds real property through a trust or estate with foreign beneficiaries can therefore see the same forms apply to a distribution.
Withholding certificate applications
Trust and estate practitioners describe the Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests as filed to request reduced tax withholding on a disposition. The request is based on the transferor's maximum tax liability.
A pending request for a withholding certificate does not automatically remove FIRPTA withholding while the certificate is under review. The withholding obligation stays in place during that review.