When a Japanese resident sells U.S. real estate, one thing they’ll inevitably run into at closing is withholding under FIRPTA (the Foreign Investment in Real Property Tax Act). Up to 15% of the sale price can be withheld at closing, which has a major impact on cash flow planning. This article explains how FIRPTA withholding works, when it’s reduced or waived, and how to get a refund.
What Is FIRPTA?
FIRPTA exists to ensure the U.S. can actually collect tax on capital gains a nonresident alien realizes from selling a U.S. real property interest (USRPI). Nonresidents generally aren’t taxed by the U.S. on income earned outside the country, but gains from selling U.S. real estate are a deliberate exception. The practical problem is that, since the seller is a nonresident, it’s hard for the IRS to assess and collect tax from them after the fact. FIRPTA solves this by placing the withholding obligation on the buyer, securing the tax at the point of sale.
The Withholding Rate
For transactions on or after February 17, 2016, the standard withholding rate is 15% of the amount realized (the total sale price). Note that this is withheld against the total sale price, not against the actual capital gain. That means even if your actual gain is small, or you’re selling at a loss, 15% of the total sale price is withheld at closing as a default rule.
When the Rate Is Reduced or Waived
If the buyer is an individual who intends to use the property as their personal residence, the following reduced rates apply:
| Amount realized | Buyer’s intended use | Withholding rate |
|---|---|---|
| $300,000 or less | Intended as a personal residence | Exempt (0%) |
| Over $300,000 up to $1,000,000 | Intended as a personal residence | 10% |
| Anything else (investment property, over $1,000,000, etc.) | – | 15% |
To qualify for this reduced rate, the buyer (or a member of their family) must have definite plans to reside at the property for at least 50% of the number of days the property is in use during each of the first two 12-month periods after the transfer. For investment rental properties, since the buyer has no intention of living there, this reduced-rate treatment generally doesn’t apply. Also worth noting: when a property is co-owned by multiple sellers, this exemption/reduction is tested against the total sale price, not prorated separately for each seller’s share.
Reducing Withholding in Advance: Form 8288-B
If the actual tax due on the capital gain is clearly going to be less than the amount that would be withheld (15% of the sale price) — for example, if the gain after depreciation is small, or you’re selling at a loss — you can file Form 8288-B (Application for Withholding Certificate) with the IRS before closing to have the withholding reduced to your estimated actual tax liability. The IRS states that it normally acts on a complete application within 90 days, so you need to start it well before closing (ideally 90 or more days ahead). If approval doesn’t come through in time, it’s common practice for escrow to hold the withholding amount and adjust it once approval arrives.
Getting Withheld Tax Back: Refunds Through Your Tax Return
The amount withheld is essentially an estimated tax payment — it doesn’t determine your final tax liability. In the year after the sale, the nonresident files Form 1040NR to calculate their actual capital gain or loss. If the withheld amount exceeds the actual tax due, the difference is refunded through the tax return; if it falls short, additional tax is owed. The buyer remits the withheld amount to the IRS within 20 days of closing using Forms 8288 and 8288-A, and the seller receives a copy of Form 8288-A, which you’ll need to keep for your tax filing.
Frequently Asked Questions
Q: Is tax still withheld if I sell at a loss?
A: Yes — since withholding is based on the sale price, not the gain, it’s withheld at closing by default even if you’re selling at a loss. If a loss is clear ahead of time, filing Form 8288-B for a reduced withholding certificate can ease the cash burden at closing.
Q: Does being a Japanese resident affect the withholding rate?
A: The FIRPTA withholding rate itself applies uniformly regardless of nationality or country of residence, so the US-Japan tax treaty doesn’t directly reduce it. However, your final tax liability, calculated through your tax return, reflects any applicable foreign tax credit adjustments between the U.S. and Japan, so double taxation is generally eliminated in the end.
This article is provided for general informational purposes only and is not a substitute for individualized tax advice. Given the timing sensitivities involved, we recommend consulting a professional well ahead of your closing date.
Summary
The defining feature of FIRPTA withholding is that it’s applied mechanically at closing based on the sale price, regardless of your actual tax liability. Investment properties in particular don’t qualify for the reduced-rate exceptions, so the cash-flow impact can be significant. If you expect a loss or an excessive withholding amount, using Form 8288-B to apply for a reduced withholding certificate — with plenty of lead time before closing — is well worth the effort.
Related Articles
- Can Nonresident Aliens Use a 1031 Exchange? Tax Deferral Strategy for Selling US Real Estate
- Depreciation Recapture When Selling a US Rental Property: The Extra Tax Owners Often Overlook
- US Estate Tax and Real Estate Investment: The $60,000 Exemption Wall for Nonresident Aliens, and How to Plan Around It
- Understanding the 1031 Exchange: Deferring Capital Gains on Real Estate Sales with Strict Deadlines