When a Nonresident Alien Sells U.S. Real Estate

By: National Association of Tax Professionals ·

When a Nonresident Alien Sells U.S. Real Estate

The sale of U.S. real estate by a nonresident alien (NRA) involves more than just a standard closing statement and Form 1099-S. Thanks to the Foreign Investment in Real Property Tax Act (FIRPTA), tax professionals must navigate a complex withholding regime designed to ensure the IRS collects tax on gains from U.S. real property interests (USRPI) before the seller leaves the table and, potentially, the country.

Why FIRPTA Exists

Under IRC §§897 and 1445, gain from a foreign seller’s disposition of a USRPI is treated as effectively connected income (ECI) and taxed at graduated rates, unlike FDAP income, which is generally taxed at 30% on a gross basis. FIRPTA withholding is the IRS’s collection mechanism at the moment of sale, not the final tax. The buyer (transferee) is the withholding agent and is personally liable if the correct amount isn’t withheld and remitted on time. Within 20 days of the transfer, the buyer must file Form 8288, transmit the withholding, and prepare Form 8288-A for each foreign transferor. The stamped Copy B of Form 8288-A is later attached to the seller’s Form 1040-NR to claim the credit.

What Counts as a USRPI?

Under §897, a USRPI includes more than just land and buildings:

• Raw land and permanent structures

• Unsevered natural products (timber, minerals)

• Improvements and associated personal property used in real property activities (e.g., farming equipment)

• Certain ownership interests in U.S. corporations holding real property

  Exclusions apply, such as publicly traded stock, certain foreclosure acquisitions, and property that is not a USRPI at the time of disposition.

How Much to Withhold?

The default FIRPTA rate is 15% of the “amount realized.” That term includes (i) cash paid, (ii) the fair market value of other property transferred, and (iii) any liability the buyer assumes or to which the property remains subject immediately before and after the transfer. When U.S. and foreign persons own property jointly, allocate the amount realized in proportion to each transferor’s capital contribution.

Reduced Rates and Exceptions

• Residential use, ≤ $300,000 purchase price: no withholding

• Residential use, > $300,000 up to $1,000,000: 10% withholding

• Nonrecognition transactions (e.g., qualifying §1031 exchanges), publicly traded interests, certain foreclosure/repo scenarios, or a valid non-foreign affidavit can eliminate or reduce withholding when conditions are met

  Practitioner tip: The buyer determines whether the residence-based exceptions apply; other relief (such as a withholding certificate) requires the seller’s statement and IRS approval.

Withholding vs. Actual Tax

FIRPTA withholding is computed on the gross amount realized, but the foreign seller’s actual tax is computed on net gain and reported on Form 1040-NR. It’s common for the final liability to be less than the amount withheld, especially for long-term holdings, so the seller often receives a refund after filing. For 2018–2025, long-term capital gains are taxed at 0%/15%/20%; many NRA real estate gains fall at 15% or 20%.

Example: Viana, a resident of Paraguay, sells property for $500,000 with a $300,000 basis. FIRPTA withholding = $75,000 (15% × $500,000). The long-term capital gain tax on $200,000 = $45,000. Viana recovers the $30,000 difference by filing Form 1040-NR with the stamped Form 8288-A.

Forms and Deadlines

When a Nonresident Alien Sells U.S. Real Estate - The buyer, as withholding agent, must:

• File Form 8288 and transmit withheld funds to the IRS within 20 days of closing

• Prepare Form 8288-A for each foreign seller and attach copies to Form 8288

• Provide the seller’s TIN (or ITIN); without it, the IRS won’t issue the stamped Form 8288-A

  The seller uses Form 1040-NR to report the sale, compute gains, and reconcile withholding. If more was withheld than the actual tax liability, the seller receives a refund.

FIRPTA and §1031 Exchanges

FIRPTA applies even when the sale is part of a like-kind exchange. For foreign sellers, the challenge is that withheld funds may not be released in time to reinvest.

Example: Frank, a French citizen, sells U.S. rental property for $1 million. His buyer must withhold $150,000. Frank plans a §1031 exchange, but unless the IRS approves his Form 8288-B before the replacement property closes, those funds won’t be available. To preserve full deferral, Frank might deposit $150,000 of his own funds with the settlement agent so the full $1 million can go to the qualified intermediary.

Rentals Before Sale – §871(d) Election

If the NRA rented the property before selling, consider the §871(d) election to treat rental income as ECI. This allows deductions for expenses (mortgage interest, taxes, depreciation). Without the election, §874(a) can bar those deductions, and rent is taxed as FDAP at 30%.

Common FIRPTA Mistakes - When a Nonresident Alien Sells U.S. Real Estate

• Using the title company’s info instead of the buyer’s

• Failing to remit withholding within 20 days

• Filing an incomplete Form 8288-B (missing TINs, contracts, or calculations)

• Refunding withheld funds to the seller before IRS approval

• Forgetting to attach the stamped Form 8288-A to the seller’s 1040-NR

Bottom Line

When a foreign seller disposes of U.S. real estate, FIRPTA can hold back thousands of dollars at closing. The key for tax professionals is early planning, accurate calculation of the amount realized, proper use of exceptions, and timely filing of forms. Done right, FIRPTA compliance keeps the deal on track and maximizes the seller’s eventual refund.