Selling US real estate as a non-resident triggers FIRPTA withholding. The IRS requires 15% of your sale price to be withheld. On a $500,000 property sale, $75,000 goes to tax authorities before you see a dime. But not every NRI selling property in the US faces this steep firpta tax withholding rate.
To cite an instance, properties under $300,000 used as the buyer's residence may qualify for 0% withholding. Sales between $300,000 and $1 million drop to a 10% firpta withholding rate. Understanding these firpta withholding exemptions can save you thousands. The refund process requires careful attention.
This article walks you through withholding rates and reduction strategies. You'll learn about required forms and state tax considerations you need to know.
Key Takeaway
FIRPTA withholding can significantly reduce your immediate sale proceeds as an NRI, but understanding the rules helps you lower the deduction and recover excess tax.
- The default withholding is 15% of the total sale price, not your capital gain, which can lock up a large amount at closing.
- Reduced rates of 10% or even 0% may apply depending on the property value and the buyer’s residential use intent.
- You can apply for a withholding certificate using Form 8288-B if your actual tax liability is lower than the standard withholding.
- Many states impose additional nonresident withholding, creating a dual federal and state tax deduction at closing.
- Most NRIs receive a refund after filing Form 1040-NR, provided they properly claim credit for the tax already withheld.
What Is FIRPTA and Why Does It Matter for NRIs?
The Foreign Investment in Real Property Tax Act of 1980 exists because many overseas property owners sold US real estate and never paid tax on their profits. FIRPTA closes this gap and makes buyers responsible for collecting tax upfront.
How FIRPTA Works at the Closing Table
Your buyer becomes the withholding agent at closing. They withhold a percentage of the total sales price and send it to the IRS within 20 days using Form 8288 and Form 8288-A. This withholding acts as a security deposit against your final tax liability. The title company or settlement agent handles this process, but the buyer remains responsible. They face penalties and may be held liable for your unpaid taxes if they fail to withhold.
Who Qualifies as a Foreign Person Under FIRPTA?
You're a foreign person if you're a nonresident alien, foreign corporation, foreign partnership, foreign trust, or foreign estate. Citizenship and visa status are separate from your tax residency status.
Does FIRPTA Apply if You Have a Green Card or H-1B Visa?
Green card holders are exempt from FIRPTA withholding. H-1B visa holders also escape withholding because they're US residents for tax purposes. Having an ITIN doesn't change your status.
What Are the Current FIRPTA Withholding Rates?
FIRPTA withholding rates operate on a three-tier system that depends on purchase price and buyer intent.
The Three Withholding Tiers Explained (0%, 10%, 15%)
Properties sold for $300,000 or less qualify for 0% withholding when the buyer plans to use it as their personal residence. The buyer must intend to occupy the property for at least 50% of the time during each of the first two years after closing.
Sales between $300,000 and $1 million drop to a 10% firpta withholding rate if the buyer intends residential use. Properties exceeding $1 million or those not intended for residential use face the full 15% withholding.
How Is the Withholding Amount Calculated? (Example with Numbers)
The withholding applies to the amount realized, not your profit. Amount realized equals cash paid plus fair market value of transferred property plus any assumed liabilities.
A $500,000 sale with standard 15% withholding sends $75,000 to the IRS. For a $750,000 property bought as a residence, the 10% rate means $75,000 withheld. Properties sold at a loss still trigger withholding. Withholding is based on gross sales price whatever your actual gain or loss.
Can NRIs Reduce or Avoid FIRPTA Withholding?
Several pathways exist to reduce the FIRPTA withholding burden before funds leave your account.
Apply for a Withholding Certificate (Form 8288-B)
Form 8288-B reduces withholding when your actual tax liability falls below the standard rate. You can file this application if your maximum tax liability is less than the required withholding amount or you qualify for nonrecognition treatment. Submit the form on or before the transfer date. The IRS processes applications within 90 days typically. While your application is pending, the buyer withholds funds but doesn't remit them to the IRS until 20 days after the certificate or denial arrives. You must notify your buyer in writing that you've applied for the certificate by closing day.
The $300,000 Buyer-Residence Exemption
Properties that sell for $300,000 or less avoid withholding when the buyer acquires it as their residence. The buyer must plan to occupy the property at least 50% of the time during each of the first two years after purchase. Days the property sits vacant don't count toward this calculation. This exemption applies only to individual buyers, not companies or investment entities.
Other Exceptions Worth Knowing
Nonrecognition provisions under tax code sections like 1031 exchanges eliminate withholding requirements. Tax treaty provisions may also reduce your obligation.
What Forms Do NRIs Need to File After Selling US Property?
Paperwork obligations extend well beyond the closing date. Three specific forms determine whether you receive a FIRPTA refund or lose money permanently.
Form 8288 and 8288-A (Buyer's Responsibility and Why It Matters to You)
Your buyer files Form 8288 within 20 days after closing to report and transmit the withheld funds to the IRS. They must prepare Form 8288-A for you as the foreign seller and attach copies to Form 8288. The IRS stamps Copy B of Form 8288-A and returns it to you. You cannot claim credit for the withheld amount on your tax return if you don't have this stamped copy.
Form 1040-NR (How to Claim Your FIRPTA Refund)
Form 1040-NR is your U.S. Nonresident Alien Income Tax Return. You report the actual gain or loss from the property sale and claim credit for FIRPTA payments made during the year. FIRPTA withholding is computed on the gross amount realized, but your actual tax is computed on net gain. This results in a refund most of the time, especially for long-term holdings. You must attach your date-stamped Form 8288-A to this return as proof of withholding.
Getting an ITIN If You Don't Have One
Foreign sellers need an ITIN to request reduced withholding and claim refunds. Apply using Form W-7 with your passport and supporting documents. Processing takes 7 weeks, or 9-11 weeks during tax season from January 15 to April 30.
Do State Taxes Apply on Top of FIRPTA?
Federal FIRPTA withholding doesn't complete your tax obligations. Many states impose their own withholding requirements on nonresident property sales. This catches NRIs off guard with additional deductions at closing.
State Withholding Rates That Catch NRIs Off Guard
State withholding rates range across jurisdictions in surprising ways. Maryland hits hardest at 8% if you're an individual and 8.25% for entities. South Carolina withholds 7% if you're an individual, while New York takes 7.7% of the capital gain rather than sales price. Rhode Island charges 6% if you're an individual but jumps to 9% for corporations.
California withholds 3.33% on properties exceeding $100,000. Hawaii mandates 5% under its Real Property Tax Act. Mississippi requires 5% on sales over $100,000, and North Carolina takes 4% of the sales price. Georgia charges 3% on properties over $20,000.
Lower-rate states include Colorado at 2% for properties over $100,000 and Maine at 2.5% for sales exceeding $50,000. Vermont charges 2.5% of the sales price.
How to Handle Dual Federal and State Withholding
Coupled with FIRPTA, you face withholding from both federal and state authorities at the same time. Your buyer remits federal withholding to the IRS and state withholding to the respective state tax department. Each requires separate forms and processing timelines. You'll claim credits for both withheld amounts on your federal Form 1040-NR and corresponding state nonresident return.
How Does the India-US DTAA Affect Your US Property Sale?
The India-US Double Taxation Avoidance Agreement doesn't eliminate FIRPTA withholding obligations, but it prevents you from losing money to taxes in both countries.
Article 13 and Capital Gains on Real Property
Article 13 of the treaty permits each country to tax capital gains according to its domestic law. The US may tax gains from immovable property situated within its borders, whatever your residence. The treaty preserves both countries' statutory taxing rights on capital gains. FIRPTA withholding still applies because the treaty doesn't override this requirement.
Claiming Foreign Tax Credit to Avoid Double Taxation
You claim a Foreign Tax Credit on your Indian tax return for taxes paid in the US. India allows a deduction equal to the US income tax paid. This deduction cannot exceed the Indian tax calculated on the same income. File Form 1116 with your US return to document foreign taxes paid. You report the property sale on Schedule D and Form 8949 in USD using IRS-approved exchange rates.
Reporting the Sale in India
You must declare your global income in your Indian tax return and include US property sale proceeds. The DTAA credit reduces your Indian liability by the amount paid in the US. You pay only the difference if Indian rates exceed US rates.
Step-by-Step FIRPTA Checklist for NRIs Selling US Property
You can break down FIRPTA compliance into three phases. This keeps you on track and prevents expensive mistakes.
Before Listing Your Property
You need to apply for an ITIN if you don't have one. Buyers need your taxpayer ID to file forms. Consult with tax professionals and real estate attorneys who have experience with FIRPTA. They can analyze your withholding situation. File Form 8288-B before closing if you expect lower tax liability than standard withholding rates. Gather documentation of your property's purchase price and improvements. Include any rental income history.
During Closing
Your buyer verifies your foreign status through a non-foreign affidavit. You sign this under penalty of perjury. The settlement agent calculates withholding based on the amount realized and reflects it on the settlement statement. Your buyer must file Form 8288 and Form 8288-A within 20 days of closing. They transmit withheld funds to the IRS. Confirm your settlement agent has FIRPTA experience. Buyer liability persists even when agents make errors.
After the Sale
File Form 1040-NR to report the sale and compute your actual gain. You can resolve withholding amounts. Attach your stamped Form 8288-A as proof of withholding. Submit your return after year-end to claim refunds when withholding exceeds actual tax liability.
Conclusion
FIRPTA withholding doesn't have to drain your profits if you understand the rules. You can reduce withholding from 15% to 10% or even 0% through buyer-residence exemptions with the right strategy. File Form 8288-B before closing at the time your actual tax liability is lower than standard rates. Complete Form 1040-NR after the sale to claim your refund because FIRPTA withholding exceeds what you owe.
Frequently Asked Questions
Can I sell my house in the US from India?
Yes, you can absolutely sell your US property while living outside the country. You will need to appoint a trusted representative or a real estate attorney to handle the closing process on your behalf through a power of attorney. The sale process itself works the same way, but as a nonresident seller, FIRPTA withholding will apply at closing. Make sure you also understand the process of buying and selling property as an NRI, since the documentation and compliance requirements differ from domestic sellers.
Is a non-resident alien subject to FIRPTA?
Yes, FIRPTA specifically applies to non-resident aliens (NRAs) who sell or dispose of US real property interests. If you do not hold a green card and do not meet the substantial presence test, the IRS considers you a foreign person, and the buyer is required to withhold a portion of the sale price at closing. However, if you pass the substantial presence test for the year of the sale, you may be treated as a US tax resident, and FIRPTA withholding would generally not apply. It is important to determine your exact tax residency status before listing your property, since this directly affects how much gets withheld.
How long does it take to get a FIRPTA refund from the IRS?
If you file Form 1040-NR after the sale to report the transaction and claim your refund, the IRS typically takes anywhere from 6 to 12 months to process it. Delays are common, especially if there are errors on the return or if the IRS has processing backlogs. You can speed things up by filing Form 8288-B before closing to request a reduced withholding amount, which means less money is held upfront. Filing your return as early as possible with all the correct documentation, including your stamped Form 8288-A, also helps avoid unnecessary delays.
What happens if the buyer forgets to withhold FIRPTA tax?
If the buyer fails to withhold the required FIRPTA amount, the IRS can hold the buyer personally liable for the tax that should have been collected, plus interest and penalties. This is why most real estate agents and closing attorneys make FIRPTA compliance a standard part of the transaction. As the seller, you are still responsible for paying any capital gains tax you owe, regardless of whether the buyer withheld or not. In cases of willful failure to withhold, the buyer could even face fines of up to $10,000 under IRS Section 7202.
About the Author
By Prakash
CEO & Founder of InvestMates
Prakash is the CEO & Founder of InvestMates, a digital wealth management platform built for the global Indian community. With leadership experience at Microsoft, HCL, and Accenture across multiple countries, he witnessed firsthand challenges of managing cross-border wealth. Drawing from his expertise in engineering, product management, and business leadership, Prakash founded InvestMates to democratize financial planning and make professional wealth management accessible, affordable, and transparent for every global Indian.
