FIRPTA Withholding Certificate
A withholding certificate is an application for a reduced withholding. It is based on the actual gain of a sale instead of the selling price. The IRS form used for this is the 8288-B. There are several advantages to filing an 8288-B.
- The money stays with the closing agent, instead of going to the IRS.
- The application can be filed as soon as a contract is signed. There’s no need to wait until closer to the sale date.
- The amount that will be refunded back is based on only the amount of the gain, not the sales price. If there is no gain, we can release all the funds. If there is a gain, the IRS will withhold the maximum capital gains rate of 20%, and we can refund the rest.
You can get the money back within 45-90 days from closing, otherwise you will have to wait until the following year to file your tax return and get your withholding back.
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Example of FIRPTA Withholding Certificate
Here is an example of how much you could get back with a FIRPTA withholding certificate. For details, and to run the numbers for a specific property sale, check out our FIRPTA calculator.
Let’s say you are selling a property for $400,000, which you bought for $275,000. For the sake of this example, we will assume you invested $30,000 into improvements, with closing costs of 6%, or $24,000. In this case, your gain would be $71,000.
$60,000 15% of the $400,000 Selling Price
– $14,200 Your Gain of $71,000 x Maximum Capital Gains of 20%
= $45,800 Refunded from Title Company
Therefore, $60,000, which is 15% of selling price, would be withheld and put in escrow at the time of closing. Next, a withholding certificate would be filed with the IRS. 45 to 90 days later, the IRS would send a letter allowing the title company to release $45,800.
Then, you would have to file a tax return in the next year to get back all or a portion of the remaining $14,200. Please note that this depends on any other U.S. source income, as well as how high the gain is.
For more information, please watch our educational video about FIRPTA withholding certificates.