Understanding FIRPTA for NRIs selling US property

If you’re an NRI who owns property in the US and is thinking of selling after moving back, FIRPTA is an important concept that you must understand and keep in mind while planning the sale.

1. What is FIRPTA?

FIRPTA (Foreign Investment in Real Property Tax Act) applies when a foreign person (including NRIs) sells their US real estate, and the buyer is required to withhold a certain amount of money to send to the IRS. Think of it as similar to when NRIs sell Indian property; the buyer has to deduct TDS before paying the seller and deposit it with the Indian tax authorities. 

The signalling from the authorities is the same in both cases - don’t trust the foreign seller to pay tax at their own will; let’s make the buyer hold some money upfront :)

2. How much gets withheld and on what exactly?

The standard withholding rate is 15% (applies on the amount realised). Amount realised generally means the full contract price and may include the value of anything else transferred, as well as any liabilities the buyer assumes as part of the deal. Buyer’s mortgage has no impact on the withholding as it’s a function of the sale price.

So if you sell a property for $400,000, the buyer withholds $60,000, regardless of what you originally paid or your actual gain. You could be selling at a loss and still see $60,000 held back.

You might also ask is there a way around the standard 15% withholding rate? It’s possible. The following 2 scenarios will cover that:

• If an individual buyer is acquiring the property to use as their residence and the amount realised is $300,000 or less, withholding drops to zero.

• If it's for residential use and the amount realised is more than $300,000 but not more than $1,000,000, the rate drops to 10%.

If the buyer isn't acquiring it for residential use or the amount realised exceeds $1,000,000, the full 15% applies regardless of price. Residential use here means the buyer actually plans to live in the property, occupying it for at least 50% of the days he/she owns the property.

3. What happens after closing the house sale? Do I (seller) actually get this money back?

Yes (in most cases). The amount withheld at closing isn’t your final tax bill; it’s a prepayment against what you actually owe. The actual number gets settled when you file a US tax return for that year (in most cases, Form 1040-NR for individuals), where you report the actual gain (or loss) on the sale and claim the amount withheld as a credit. 

Going back to the earlier example, if you sold at $400,000 with a $150,000 gain and $60,000 was withheld, and at the time of US tax filing your actual US tax liability, let’s say, works out to be $25,000, you’ll get a refund of $35,000. 

Having a withholding certificate plays an important role for anyone with a smaller real gain or a loss. Without it, you're stuck lending the IRS your own money interest-free for months, then filing to get it back at the time of a refund.

4. What’s a withholding certificate?

(Similar idea as applying for a lower TDS certificate when NRIs sell property in India)

Before closing a sale, you (or your tax advisor) can file Form 8288-B with the IRS, showing your actual expected gain and real tax liability instead of the flat rate. If approved, only that lower amount gets withheld at closing, so you're not waiting months for a refund on money that was never really owed. 

Again, using the example from before - instead of $60,000 withheld and roughly $35,000 refunded later, an approved certificate means only around $25,000 gets withheld upfront, matching your actual tax liability. There's barely anything left to refund, because you never overpaid in the first place. 

Keep in mind - 

• The IRS has mentioned it usually takes around 90 days to act on this, so it needs to be filed well before your closing date (source: https://www.irs.gov/pub/irs-pdf/i8288.pdf).

• This doesn't replace filing your US tax return; that's still mandatory either way.

Overall, the 15% headline isn’t your actual tax bill. It's worth working with a qualified cross-border tax expert who's handled non-resident returns and is familiar with FIRPTA rules to guide you through this process.

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