When a foreign person sells U.S. real estate, the IRS wants to make sure any taxes on the gain are properly paid. That’s where Form 8288 comes into play. It’s the official record keeper to report and pay the withholding tax required under FIRPTA (the Foreign Investment in Real Property Tax Act).

What is Form 8288?

Form 8288, U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons, is filed by either the buyer or transferee when purchasing real estate from a foreign owner. The buyer is required to withhold 15% of the total purchase price, and send it to the IRS using that form. This withheld tax acts as a prepayment of the foreign seller’s U.S. tax liability from the sale. While it might sound redundant, it helps both the buyer and seller. This is required to be filed within 20 days of the sale if FIRPTA withholding applies.

The companion Forms 8288-A and 8288-B

1️⃣ Form 8288-A: Statement of Withholding

When filling out the form, you’ll need to include a copy of Form 8288-A – which identifies who the foreign seller is, and provides details about the property sale and withholding amount.

The IRS processes the form, stamps a copy, and mails it back to the foreign seller. The point of the copy? It serves as the seller’s proof of withholding and can be later used to collect a credit or refund on their U.S. tax return.

Without the stamped form, the seller could run into problems proving the taxes were paid or claiming their refund.

 2️⃣ Form 8288-B: Application for Withholding Certificate

Sometimes the standard 15% withholding is higher than the seller’s tax liability. In that case, the seller can file this form with the standard to request a reduced withholding rate. Occasionally, there is a possibility for an exemption before the sale closes.

Examples include:

• When the property is sold at a loss
• When it’s part of a like-kind exchange
• When the seller qualifies for a nonrecognition provision under the tax code

If the IRS approves the Form B application, the buyer can withhold less, or none at all, based on the certificate’s instructions. However, if the buyer doesn’t receive the certificate before closing, they’re required to withhold the full 15% and submit Form 8288 as is.

It’s importance and possible penalties

FIRPTA compliance is taken very seriously. If a buyer fails to withhold or pay the required amount there are a few things that can happen:

• The IRS can hold the buyer personally liable for the full tax amount
• They can they can charge interest on a balance, and
• Add penalties for late filing or nonpayment. 

Even if the seller is the one who owes the tax, the buyer is legally responsible for ensuring that the withholding and filing are completed.

• For buyers: It prevents personal liability for the seller’s unpaid tax
• For sellers: It documents that FIRPTA has been properly recorded and that it can be later credited or refunded
• For both: It keeps the property sale IRS compliant and avoids possible audit issues

If you’ve read my first post on FIRPTA, Form 8288 is essentially the internal workings that makes the practice work.  For anyone involved in a real estate transaction with a foreign seller, understanding these forms and their importance is crucial.