If you are a German national who owns real estate in Cape Coral or elsewhere in Southwest Florida, there is an important U.S. tax rule you need to understand before selling: FIRPTA.
FIRPTA withholding can significantly reduce the cash you receive at closing, even when your final U.S. income tax is much lower than the amount withheld. Proper planning can help you avoid unnecessary delays and recover any excess withholding as efficiently as possible.
What Is FIRPTA?
FIRPTA stands for the Foreign Investment in Real Property Tax Act. When a foreign person sells U.S. real estate, the buyer is generally required to withhold a percentage of the amount realized and remit it to the IRS.
The standard withholding rate is 15%.
FIRPTA withholding is not necessarily the seller’s final tax. It is an advance payment intended to secure payment of any U.S. income tax resulting from the sale.
For example, if you sell a Cape Coral vacation home for $300,000 and no exception applies, the buyer may be required to withhold $45,000. You must then file a U.S. income tax return reporting the sale, calculate the actual tax, and claim credit for the amount withheld.
If your actual tax is less than $45,000, you can request a refund of the difference.
Who Is Subject to FIRPTA?
FIRPTA generally applies when the seller is a foreign person for U.S. tax purposes. This includes nonresident alien individuals and certain foreign corporations, partnerships, trusts, and estates.
Citizenship alone does not determine whether FIRPTA applies. A German citizen may be considered a U.S. resident for tax purposes by satisfying the green-card test or substantial-presence test.
Similarly, visa status does not automatically determine tax residency. A German national living in the United States on a visa may be a resident or nonresident for U.S. tax purposes, depending on the person’s immigration status, physical presence, and other circumstances.
The seller’s tax-residency status should be reviewed before the parties assume that FIRPTA withholding is—or is not—required.
How Much Is Withheld?
The general FIRPTA withholding rate is 15% of the amount realized.
The “amount realized” is not always limited to the cash sales price. It may also include liabilities assumed by the buyer or liabilities to which the property remains subject.
Special rules may apply when an individual buyer acquires the property for use as a residence and satisfies the applicable occupancy requirements:
- If the amount realized is $300,000 or less, no FIRPTA withholding may be required.
- If the amount realized is more than $300,000 but not more than $1 million, the withholding rate may be reduced to 10%.
- If the amount realized exceeds $1 million, the withholding rate is generally 15%.
The residence exception depends on the buyer’s intended use of the property, not on whether the property was the seller’s vacation home. The buyer or a qualifying family member must have definite plans to occupy the property for the required portion of the applicable two-year period.
If the buyer does not satisfy the residence-use requirements, the general 15% withholding rate ordinarily applies.
Who Is Responsible for the Withholding?
The buyer is generally the legally responsible withholding agent. In practice, the title company or closing agent typically prepares the applicable forms, collects the required amount from the seller’s proceeds, and submits the withholding to the IRS.
Because the buyer can be held liable if the correct amount is not withheld, buyers and closing agents are often cautious when applying an exemption or reduced rate.
Can FIRPTA Withholding Be Reduced Before Closing?
A foreign seller can apply for an IRS withholding certificate using Form 8288-B. In theory, the certificate can reduce or eliminate withholding when the standard amount exceeds the seller’s maximum expected U.S. tax liability.
The IRS states that it will normally act on a complete application within 90 days. In practical experience, however, Form 8288-B processing has frequently taken considerably longer since the COVID-19 pandemic.
The process remains paper-based, and it can be difficult to obtain timely information about a pending application. If the application is still pending at closing, the required funds may need to remain in escrow until the IRS issues its decision.
For these reasons, we generally do not recommend filing Form 8288-B for a typical property sale.
Why We Usually Recommend Withholding at Closing
In most cases, we recommend allowing the required FIRPTA amount to be withheld and remitted to the IRS at closing. After the calendar year ends, we prepare and file the seller’s U.S. income tax return as early as reasonably possible.
The return reports the actual taxable gain, claims credit for the FIRPTA withholding, and requests a refund of any excess.
This approach generally offers a clearer and more predictable process than waiting for the IRS to issue a withholding certificate. It also avoids the possibility that a pending Form 8288-B application will delay the release of funds held in escrow.
For example, assume that $45,000 is withheld at closing but the seller’s actual U.S. tax on the sale is only $12,000. The seller can claim the remaining $33,000 as a refund on the U.S. income tax return.
How Is the Actual Tax Calculated?
FIRPTA withholding is based on the amount realized, but the seller’s actual U.S. income tax is generally based on the taxable gain.
The calculation may take into account:
- The property’s original purchase price
- Certain acquisition costs
- Capital improvements
- Selling expenses
- Depreciation allowed or allowable
- Prior rental use
- Suspended passive-activity losses, when available
- The seller’s ownership percentage
- The seller’s legal and tax ownership structure
- Applicable federal tax rates
The difference between the gross amount realized and the taxable gain is why FIRPTA withholding can substantially exceed the seller’s actual tax.
Filing the U.S. Tax Return Early
A calendar-year U.S. income tax return cannot be filed before the calendar year has ended. Once the year closes, however, the return can be prepared and filed promptly after all required information and documentation become available.
A nonresident individual will generally report the transaction on Form 1040-NR.
To prepare the return and substantiate the refund, the seller may need:
- The original purchase closing statement
- The final sales closing statement
- Invoices and proof of payment for capital improvements
- Prior depreciation schedules
- Rental-income and expense records
- The seller’s U.S. taxpayer identification number
- Form 8288-A or other acceptable evidence of the withholding
The IRS ordinarily sends the seller a stamped copy of Form 8288-A after processing the buyer’s withholding submission. Including the seller’s correct taxpayer identification number on the withholding documents is extremely important. Missing or inconsistent information can delay both the withholding credit and the refund.
The IRS cautions that refunds involving Form 8288-A may require additional processing time. Nevertheless, based on our practical experience, filing a complete Form 1040-NR promptly after year-end is generally preferable to relying on a pre-closing withholding-certificate application.
When Might Form 8288-B Still Make Sense?
Although we generally recommend withholding at closing, every transaction should be evaluated individually.
A Form 8288-B application may still be worth considering when:
- The potential withholding is exceptionally large
- The sale occurs early in the calendar year
- Waiting until the following filing season would create a serious cash-flow burden
- The seller has no taxable gain
- The transaction qualifies for nonrecognition treatment
- The closing schedule provides sufficient time for an IRS decision
- The buyer and escrow agent are willing to accommodate a potentially lengthy delay
We compare the expected withholding, actual tax liability, closing date, likely IRS processing time, and the seller’s cash-flow needs before making a recommendation.
Does the U.S.–Germany Tax Treaty Eliminate FIRPTA?
Usually not.
The U.S.–Germany income tax treaty generally allows the United States to tax a German resident’s gain from selling real property located in the United States. A seller should not assume that German citizenship or residence creates an exemption from FIRPTA.
The seller may also have reporting obligations in Germany.
Coordinated advice from qualified U.S. and German tax professionals may therefore be appropriate.
What Should You Do Before Selling?
If you are planning to sell property in Cape Coral, Fort Myers, Naples, Sarasota, or elsewhere in Southwest Florida:
- Contact us before closing so we can estimate the FIRPTA withholding and your actual U.S. tax liability.
- Confirm your U.S. tax-residency status and the property’s ownership structure.
- Make sure each foreign seller has the appropriate U.S. taxpayer identification number.
- Gather the original purchase records, improvement invoices, depreciation schedules, and rental records.
- Confirm that the closing agent correctly prepares Forms 8288 and 8288-A.
- Allow the required FIRPTA amount to be withheld unless the facts justify a different approach.
- After year-end, provide the final documents promptly so we can prepare your U.S. income tax return as early as reasonably possible.
- Claim credit for the FIRPTA withholding and request a refund of any amount exceeding your actual U.S. tax.
Why Work With an Experienced CPA?
FIRPTA involves more than applying a percentage at closing. Tax residency, ownership structure, depreciation, improvements, selling costs, rental activity, exchange rates, and the timing of the transaction can all affect the final result.
At The Nye-Schmitz Accounting Firm, P.A., we assist German property owners with the U.S. tax aspects of Southwest Florida real estate sales.
Our services may include:
- Determining whether FIRPTA applies
- Estimating the required withholding
- Calculating the seller’s expected U.S. tax liability
- Preparing or reviewing closing and withholding documents
- Preparing Form 1040-NR
- Claiming refunds of excess FIRPTA withholding
- Responding to related IRS correspondence
- Coordinating with the seller’s German tax adviser when appropriate
Our objective is not simply to reduce the amount shown at closing. It is to choose the procedure most likely to recover the seller’s money efficiently and with the least administrative uncertainty.
Although Form 8288-B may appear attractive, lengthy and unpredictable IRS processing has made withholding certificates impractical for many sellers. In most cases, we recommend allowing FIRPTA withholding at closing and filing the seller’s U.S. income tax return promptly after the end of the year.
To schedule a consultation, call (239) 400-4998 or email Mail@tnsaccounting.com.
Sebastian Nye-Schmitz, CPA
The Nye-Schmitz Accounting Firm, P.A.
5425 Park Central Court
Naples, Florida 34109
This article provides general information and is not a substitute for tax advice based on a seller’s particular circumstances. Tax laws, forms, and IRS procedures may change.